Chapter 13: The Classical Econometric Model
This chapter will introduce and discuss the classical econometric box model. We will use CEM as our acronym for this fundamental model. In other books and articles, you might see this model referred to as the classical linear model or the classical regression model. The name is not as important as the content.
The CEM has been by far the most commonly used description of the data generation process in econometrics. Understanding the requirements, functioning, and characteristics of the CEM is extremely important because modeling the data generation process is a crucial step in econometric analysis. Without a model of how the data were generated, inference is impossible. Subsequent chapters present more complicated box models designed to handle some of the situations in which this basic model deals inadequately with the data generation process.
Sections 13.2 and 13.3 present a hypothetical example designed to provide
an intuitive understanding of the CEM, and Sections 13.4 and 13.5 describe
the CEM in a more formal way.