Model Averaging and Its Use in Economics
Journal of Economic Literature
vol. 58,
no. 3, September 2020
(pp. 644-719)
Abstract
The method of model averaging has become an important tool to deal with model uncertainty, for example in situations where a large amount of different theories exist, as are common in economics. Model averaging is a natural and formal response to model uncertainty in a Bayesian framework, and most of the paper deals with Bayesian model averaging. The important role of the prior assumptions in these Bayesian procedures is highlighted. In addition, frequentist model averaging methods are also discussed. Numerical techniques to implement these methods are explained, and I point the reader to some freely available computational resources. The main focus is on uncertainty regarding the choice of covariates in normal linear regression models, but the paper also covers other, more challenging, settings, with particular emphasis on sampling models commonly used in economics. Applications of model averaging in economics are reviewed and discussed in a wide range of areas including growth economics, production modeling, finance and forecasting macroeconomic quantities.Citation
Steel, Mark F J. 2020. "Model Averaging and Its Use in Economics." Journal of Economic Literature, 58 (3): 644-719. DOI: 10.1257/jel.20191385Additional Materials
JEL Classification
- C11 Bayesian Analysis: General
- C15 Statistical Simulation Methods: General
- C20 Single Equation Models; Single Variables: General
- C52 Model Evaluation, Validation, and Selection
- O47 Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence