now that I have everyone's attention, I would like to bring up a topic that concerns anyone pursuing empirical research in their Ph.D. At one point or another we have all set down and wondered where the credibility of any econometric research is, given that once one goes beyond OLS it is possible to create almost any result.
While this topic is not as recent as the sub prime crises I think that it is worth discussing it a bit.
There is a very nice paper by Larry Summers : The Scientific Illusion in Empirical Macroeconomics. While the paper is from 1991, he brings up a very important point. Namely that most of the research applying very advanced econometrics does not really advance our thinking professionally. One really good example he gives is about the short run real effects of monetary policy. In a pioneering study Friedman and Schwartz show the real effects of monetary policy with a very simple narative study. In fact this really changed thinking about economics as a science, but do VARs have the same contribution?
I think it would have been good for me to have read this at the beginning of my Ph.D. rather than towards the end..... I do tend to agree with Summers that sometimes in empirical research, the method starts to dominate. I mean there are very, very many VAR studies for instance, but how many of them did actually contribute to the way we think about economics?
These days I tend to think that the best empirical papers will change the readers perception of the world. Look for instance at the original sin literature. Fantastic contribution with just OLS regressions.
An even older piece of research about econometrics and whether it is a science or not is also David Hendry's classic article: Econometrics: Alchemy or Science? from 1978 in Economica.
Enjoy and share your opinion about modern econometrics in applied research.