The Empirical Appraisal of Economic Theories, Econometric Testing and the Logic of Refutation

Abstract

This paper comprehensively analyses the logical problems involved in conventional tests of economic theories. It also outlines some methodological problems with current econometric practice. An alternative test procedure which constitutes a logically complete and rigorous extension of conventional test procedures is proposed in order to attenuate some of the problems identified. The test is implemented in a practical context by considering the debate over the inclusion of real money balances in the neoclassical aggregate production function.