2. Issues to discuss No consensus on good econometric practise
Reality much more rich and complex than the theory
The ceteris paribus in economic and econometric modelling

3. The specific-to-general (VAR)
ceteris paribus variables dumped into the error term
low ability to recject a theory model when inadeqate
Few (constant) parameters (by assumption)
No free parameters
Known expectations formation

4. The general-to-specific
Combination of induction and deduction
Weak link between theory model and reality
Can adequately account for
unit root nonstationarity
structural breaks, such as shifts in equlibrium mean and growth rates

5. A discussion of some basic principles for empirical research using as an illustration Friedmans claim that ’Inflation is always and everywhere a monetary problem’
Imbedding the theory model in a broader empirical framwork: the pulling and pushing forces
Formulating a set of empirically testable hypotheses
on different levels of generality
Deductive inference: testing prior hypotheses
Inductive inference: generating new hypotheses
Reformulating the empirical problem/ the theoretical problem, or both

6. Pulling and pushing forces

10. Imbedding Romer's money demand model in the VAR

11. The pushing forces:
First level:
Second level:

12. The pulling forces
First level:
Because:

13. Second level:
The restrictions on β contain hypotheses on:
money demand
the Fisher parity
the expectations hypothesis
The restrictions on α contain hypotheses on:
pushing behavior (weak exogeneity)
adjustment behavior (unit vectors in α)

14. The role of expectations
for the specification of the long-run relations
for the short-run dynamics

15. The Fisher parity

16. The expectations hypothesis

17. To sum up:

18. Deductive inference

21. Inductive inference

24. Conclusions
The deductive part is based on testable implications of a theory model translated into a set of hypotheses in a VAR
The inductive part treats any discrepancies between theory and the data as a useful piece of information, allowing us to adjust our intuition of how the economic and the empirical model work together: generates new hypotheses
Generates a set of ’sophisticated’ stylized facts
The sensitivity of theory based conclusions to the ceteris paribus assumption