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IPFS News Link • Economic Theory

Vector Auto-Regression and Classical Economic Theory: Will the Keynesian Saga Ever End?

• https://libertarianinstitute.org by Mike Steele

A VAR model is made up of a system of equations that represents the relationships between multiple variables. For example, variables such as unemployment, interest, and inflation rates may be incorporated into a VAR model. Theories have been developed that claim to improve model misspecification, thereby avoiding inaccuracies.1 These models are interesting but the substrate on which any economic framework rests should take priority. This analysis argues that in the absence of classical economic theory, a model, regardless of complexity, cannot correspond to economic realities or provide real-world solutions. The Keynesian econometric framework, which nearly all models are based on, possesses fallacious twentieth-century concepts regarding centralized planning and a demand-driven economy.


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