Money and Markets: Essays in Honor of Leland B. Yeager

Good ideas and bad regressions 73approximate. One cannot expect to find structural models in these papers. Theconsequence is that PC regressions cannot provide useful information abouthypothesis tests of the theories or measurement of key parameters. In the end, badregressions are produced.Why do PC researchers shun the use of advanced econometric methods? Onepossibility is that the PC researchers are unaware of these methods or lack the skillsto apply them to their PC regressions models. This explanation is inadequate fortwo reasons: the widespread availability of LIMDEP software and the possibility ofco-authorship or friendly advice.The LIMDEP software makes the application of the limited-dependent variablemethods very easy. The program is menu-driven so that all one has to do is checkthe appropriate box and then estimate the model. With LIMDEP, estimating anadvanced econometric model is literally as simple as estimating an OLS regression.One simply needs to check a different box on the menu.One reason PC researchers may not effectively use software like LIMDEP isbecause those working in the PC area may not be aware of the appropriate econ o-metric model to apply. The solution to this problem is to acquire a co-author orseek the advice of an econometrician. The co-author or the econometrician may beable to point the PC researcher in the direction of an efficient statistical procedure.With the availability of user-friendly software and econometric advice, why mightPC researchers still shun advanced econometric methods? The econometricianmay decline to become involved for two reasons. First, the project might be sowhimsical that the econometrician might worry about a loss of reputation if theproject is embraced. Second, the econometrician may simply decide that estimatinga “pro forma reduced form” full of proxy variables is not the place for anadvanced econometric method. Advanced econometric methods might not beused because the author decided the audience would not be interested. A readerundisturbed by a “pro forma reduced form” regression model full of proxyvariables would not likely care about the omission of advanced econometrics.The ultimate consequence is a watering down of PC empirical research. Withpoor data there is little point in applying advanced econometric methods. We havebad on top of bad and the end result is a bad regression.One might try to justify the state of empirical research by using an argumentalong the lines presented by Laband and Taylor (1992) to explain the abundance ofbad writing in economics. Laband and Taylor argue that the writing in economicsis as bad as the market will bear. That is, poorly written papers are being citedat roughly the same rate as well-written papers, so the market has spoken.Laband and Taylor argue that the market is not penalizing those for writingpoorly.Can the same be argued for bad regressions? In the reply to Laband and Taylor,McCloskey argues that one of our duties as teachers is to teach students to be betterwriters. We should educate individuals to consume and produce high-qualitywriting. If we, as economists, are charged with educating in the area of writing, wehave an even greater responsibility to educate in the area of econometrics.