Econometrics and economic policy

This is a survey paper on five important developments in econometrics, with illustrative applications to economic policy formulation in Taiwan, Mainland China and the United States. The developments axe the endogeneity of explanatory variables in a stochastic equation, nonstationarity of dynamic models in the form of cointegrated variables, the determination of optimal policies, accounting for reactions of economic agents to changing policy rules, and the use of conditional expectations to capture forward looking behavior.