COMMENTS ON TESTING ECONOMIC-THEORIES AND THE USE OF MODEL SELECTION CRITERIA

This paper outlines difficulties with testing economic theories, parti cularly that the theories may be vague, may relate to a decision inter val different from the observation period, and may need a metric to co nvert a complicated testing situation to an easier one. We argue that it is better to use model selection procedures rather than formal hypo thesis testing when deciding on model specification. This is because t esting favors the null hypothesis, typically uses an arbitrary choice of significance level, and researchers using the same data can end up with different final models.