Economic Glossary

Glossary of research economics Page 1 of 236
There are 1332 items in this version of the glossary, dated November 27, 2005. Copyright 1997-2005,
Peter B. Meyer.
2SLS: an abbreviation for two stage least squares, an instrumental variables estimation technique.
Contexts: econometrics; estimation
3SLS: A kind of simultaneous equations estimation. Made up of 2SLS followed by SUR. First proposed
by Zellner and Theil, Econometrica, 1962, pp 54-78.
a fortiori: Latin for "even stronger". Can be used to compare two theorems or proofs. Could be
interpreted to mean "in the same way."
Contexts: phrases
a priori: It is always used in the phrase "a priori" often shown in italics because it is not English, but
comes from Latin. In the economics context "a priori" means "it is assumed in advance". It means: "we
think it is logical that . . . " or "we had to assume something, and we assumed this, without evidence."
The writer is also implying "I do not cite evidence here because I do not know it or do not wish to
discuss it." I do not know why they do not say this in English. It may come from the formal logic of
proof in mathematics, developed over hundreds of years by people who knew Latin. It may have also a
more precise meaning than I said there but I am sure this is clear enough to help. Or maybe they like "a
priori" because it is so short.
Contexts: phrases
A-D equilibrium: abbreviation for Arrow-Debreu equilibrium.
AAEA: American Agricultural Economics Association. See their web site at http://www.aaea.org.
abnormal returns: Used in the context of stock returns; means the return to a portfolio in excess of the
return to a market portfolio. Contrast excess returns which means something else. Note that abnormal
returns can be negative.
Example: Suppose average market return to a stock was 10% for some calendar year, meaning stocks
overall were 10% higher at the end of the year than at the beginning, and suppose that stock S had risen
12% in that period. Then stock S's abnormal return was 2%.
Contexts: finance
absolute risk aversion: An attribute of a utility function. See Arrow-Pratt measure.
Contexts: micro theory; finance
absorptive capacity: A limit to the rate or quantity of scientific or technological information that a firm
can absorb. If such limits exist they provide one explanation for firms to develop internal R&D
capacities. R&D departments can not only conduct development along lines they are already familiar
with, but they have formal training and external professional connections that make it possible for them
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to evaluate and incorporate externally generated technical knowledge into the firm better than others in
the firm can. In other words a partial explanation for R&D investments by firms is to work around the
absorptive capacity constraint.
This term comes from Cohen and Levinthal (1990).
Source: Cohen W., and D. Levinthal. 1990. "Absorptive capacity: a new perspective on learning and
innovation." Administrative Science Quarterly 35(1) pp 128-152.
Contexts: IO; organizations; theory of the firm
abstracting from: a phrase that generally means "leaving out". A model abstracts from some elements
of the real world in its demonstration of some specific force.
Contexts: phrases
accelerator principle: That it is the growth of output that induces continuing net investment. That is,
net investment is a function of the change in output not its level.
Source: Branson
Contexts: macro
acceptance region: Occurs in the context of hypothesis testing. Let T be a test statistic. Possible values
of T can be divided into two regions, the acceptance region and the rejection region. If the value of T
comes out to be in the acceptance region, the null hypothesis being tested is not rejected. If T falls in the
rejection region, the null hypothesis is rejected.
The terms 'acceptance region' and 'rejection region' may also refer to the subsets of the sample space that
would produce statistics T in the acceptance region or rejection region as defined above.
Source: Davidson and MacKinnon, 1993, p 78-79

Contexts: econometrics; statistics; estimation
ACIR: Advisory Council on Intergovernmental Relations, in the U.S.
Contexts: organizations
active measures: In the context of combating unemployment: policies designed to improve the access
of the unemployed to the labor market and jobs, job-related skills, and the functioning of the labor
market. Contrast passive measures.
Source: John P. Martin, D16 readings book

Contexts: labor; macro
adapted: The stochastic process {Xt} and information sets {Yt} are adapted if {Xt} is a martingale
difference sequence with respect to {Yt}.
Contexts: statistics; econometrics
AEA: American Economics Association

AER: An abbreviation for the American Economic Review.
Contexts: journals
affiliated: From Milgrom and Weber (Econometrica, 1982, page 1096): Bidders' valuations of a good
being auctioned are affiliated if, roughly: "a high value of one bidder's estimate makes high values of the
others' estimates more likely."
There may well be good reasons not to use the word correlated in place of affiliated. This editor is
advised that there is some mathematical difference.
Source: Milgrom and Weber, Econometrica, 1982, p 1096.

Contexts: auctions; micro theory; modelling
affine: adjective, describing a function with a constant slope. Distinguished from linear which
sometimes is meant to imply that the function has no constant term; that it is zero when the independent
variables are zero. An affine function may have a nonzero value when the independent variables are
zero.
Examples: y = 2x is linear in x, whereas y = 2x + 7 is an affine function of x.
And y = 2x + z2 is affine in x but not in z.
Contexts: real analysis
affine pricing: A pricing schedule where there is a fixed cost or benefit to the consumer for buying
more than zero, and a constant per-unit cost per unit beyond that. Formally, the mapping from quantity
purchased to total price is an affine function of quantity.
Using, mostly, Tirole's notation, let q be the quantity in units purchased, T(q) be the total price paid, p
be a constant price per unit, and k be the fixed cost, an example of an affine price schedule is T(q)
=k+pq.
For alternative ways of pricing see linear pricing schedule and nonlinear pricing.
Source: Tirole, p 136

Contexts: IO
AFQT: Armed Forces Qualifications(?) Test -- a test given to new recruits in the U.S. armed forces.
Results from this test are used in regressions of labor market outcomes on possible causes of those
outcomes, to control for other causes.
Contexts: data; labor
AGI: An abbreviation for Adjusted Gross Income, a line item which appears on the U.S. taxpayer's tax
return and is sometimes used as a measure of income which is consistent across taxpayers. AGI does not
include any accounting for deductions from income that reduce the tax due, e.g. for family size.
Contexts: public finance; labor
agricultural economics: "Agricultural Economics is an applied social science that deals with how
producers, consumers, and societies use scarce resources in the production, processing, marketing, and
consumption of food and fiber products." (from Penson, Capps, and Rosson (1996), as cited by Hallam
1998).

Source: Penson, Capps, and Rosson, 1996; Hallam, 1998

Contexts: agricultural economics; fields
AIC: abbreviation for Akaike's Information Criterion
Contexts: econometrics; time series; estimation
AJS: An abbreviation for the American Journal of Sociology.
Contexts: journals
Akaike's Information Criterion: A criterion for selecting among nested econometric models. The AIC
is a number associated with each model:
AIC=ln (sm2) + 2m/T
where m is the number of parameters in the model, and sm2 is (in an AR(m) example) the estimated
residual variance: sm2 = (sum of squared residuals for model m)/T. That is, the average squared residual
for model m.
The criterion may be minimized over choices of m to form a tradeoff between the fit of the model
(which lowers the sum of squared residuals) and the model's complexity, which is measured by m. Thus
an AR(m) model versus an AR(m+1) can be compared by this criterion for a given batch of data.
An equivalent formulation is this one: AIC=T ln(RSS) + 2K where K is the number of regressors, T the
number of obserations, and RSS the residual sum of squares; minimize over K to pick K.
Source: Watson's compressed notes, p. 23; RATS maual pg. 5-18

Contexts: econometrics; time series
alienation: A Marxist term. Alienation is the subjugation of people by the artificial creations of people
"which have assumed the guise of independent things." Because products are thought of as commodities
with money prices, the social process of trade and exchange becomes driven by forces operating
independently of human will like natural laws.
almost surely: With probability one. In particular, the statement that a series {W n} limits to W as n
goes to infinity, means that Pr{Wn->W}=1.
Contexts: probability; statistics; econometrics
alternative hypothesis: "The hypothesis that the restriction or set of restrictions to be tested does NOT
hold." Often denoted H1. Synonym for 'maintained hypothesis.'

Americanist: A member of a certain subfield of political science.
Contexts: political science

AMEX: American Stock Exchange, which is in New York City
aML: A programming language/environment for maximum likelihood estimation, allowing complicated

error specifications. Their web site.
Contexts: estimation
Amos: A statistical data analysis program, discussed at http://www.smallwaters.com/amos.
Contexts: data
analytic: Often means 'algebraic', as opposed to 'numeric'. E.g., in the context of taking a derivative,
which could sometimes be calculated numerically on a computer, but is usually done analytically by
finding an algebraic expression for the derivative.
Contexts: phrases
annihilator operator: Denoted []+ with a lag operator polynomial in the brackets. Has the effect of
removing the terms with an L to a negative power; that is, future values in the expression. Their
expected value is assumed to be zero by whoever applies the operator.
Contexts: models
Annuity formula: If annuity payments over time are (0,P,P,...P) for n periods, and the constant interest
rate r>0, then the net present value to the recipient of the annuity can be calculated this way: NPV(A) =
(1-(1+r)-n)P/r
Contexts: finance
ANOVA: Stands for analysis-of-variance, a statistical model meant to analyze data. Generally the
variables in an ANOVA analysis are categorical, not continuous. The term main effect is used in the
ANOVA context. The main effect of x seems to mean the result of an F test to see if the different
categories of x have any detectable effect on the dependent variable on average.
ANOVA is used often in sociology, but rarely in economics as far as this editor can tell. The terms
ANCOVA and ANOCOVA mean analysis-of-covariance.
From Kennedy, 3rd edition, pp226-227: "Analysis of variance is a statistical technique designed to
determine whether or not a particular classification of the data is meaningful. The total variation of the
dependent variable (the sum of squared differences between each observation and the overall mean) can
be expressed as the sum of the variation between classes (the sum of the squared differences between the
mean of each class and the overall mean, each times the number of observations in that class) and the
variation within each class (the sum of the squared difference between each observation and its class
mean). This decomposition is used to structure an F test to test the hypothesis that the between-class
variation is large relative to the within-class variation, which implies that the classification is
meaningful, i.e., that there is a significant variation in the dependent variable between classes. If dummy
variables are used the capture these classifications and a regression is run, the dummy variable
coefficients turn out to be the class means, the between-class variation is the regression's "explained"

variation, the within-class variation is the regression's "unexplained" variation, and the analysis of
variance F test is equivalent to testing whether or not the dummy variable coefficients are significantly
different from one another. The main advantage of the dummy variable regression is that it provides
estimates of he magnitudes of class variation influences on the dependent variables (as well as testing
whether or not the classification is meaningful).
"Analysis of covariance is an extension of analysis of variance to handle cases in which there are some
uncontrolled variables that could not be standardized between classes. These cases can be analyzed by
using dummy variables to capture the classifications and regressing the dependent variable on these
dummies and the uncontrollable variables. The analysis of covariance F tests are equivalent to testing
whether the coefficient of the dummies are significantly different from one another. These tests can be
interpreted in terms of changes in the residual sums of squares caused by adding the dummy variables.
Johnston (1972, pp 192-207) has a good discussion."
Kennedy also says: "In light of the above, it can be concluded that anyone comfortable with regression
analysis and dummy variables can eschew analysis of variance and covariance techniques." [But one
needs to understand the academic work out there, not just write one's own. -ed.]
Source: Stata manuals; Kennedy, 1992

Contexts: statistics; sociology
APT: Arbitrage Pricing Theory; from Stephen Ross, 1976-78. Quoting Sargent, "Ross posited a
particular statistical process for asset returns, then derived the restrictions on the process that are implied
by the hypothesis that there exist no arbitrage possibilities."
The APT includes multiple risk factors, unlike the CAPM.
Source: Sargent, 1987, p 112; Ross, 1976

Contexts: finance; models
AR: Stands for "autoregressive." Describes a stochastic process (denote here, et) that can be described
by a weighted sum of its previous values and a white noise error. An AR(1) process is a first-order one,
meaning that only the immediately previous value has a direct effect on the current value:
et = et-1 + ut
where  is a constant that has absolute value less than one, and ut is drawn from a distribution with mean
zero and finite variance, often a normal distribution.
An AR(2) would have the form:
et = 1et-1 + 2et-2 + ut
and so on. In theory a process might be represented by an AR(infinity).
Contexts: time series; econometrics; statistics
AR(1): A first-order autoregressive process. See AR for details.
Contexts: statistics
ARCH: Stands for Autoregressive Conditional Heteroskedasticity. It's a technique used in finance to
model asset price volatility over time. It is observed in much time series data on asset prices that there
are periods when variance is high and periods where variance is low. The ARCH econometric model for

this (introduced by Engle (1982)) is that the variance of the series itself is an AR (autoregressive) time
series, often a linear one.
Formally, per Bollerslev et al 1992 and Engle (1982): An ARCH model is a discrete time stochastic
process {et} of the form: et = ztst
where the zt's are iid over time, E(zt)=0, var(zt)=1, and st is positive and time-varying. Usually s t is
further modeled to be an autoregressive process.
According to Andersen and Bollerslev 1995/6/7, "ARCH models are usually estimated by maximum
likelihood techniques." They almost always give a leptokurtic distrbution of asset returns even if one
assumes that each period's returns are normal, because the variance is not the same each period. Even
ARCH models, however, do not usually generate enough kurtosis in equity returns to match U.S. stock
data.
Source: Engle, 1982

Contexts: finance; statistics; time series
ARIMA: Describes a stochastic process or a model of one. Stands for "autoregressive integrated
moving-average". An ARIMA process is made up of sums of autoregressive and moving-average
components, and may not be stationary.
Source: Enders, 1996, p 23

Contexts: time series; econometrics
ARMA: Describes a stochastic process or a model of one. Stands for "autoregressive moving-average".
An ARMA process is a stationary one made up of sums of autoregressive and moving-average
components.

Arrovian uncertainty: Measurable risk, that is, measurable variation in possible outcomes, on the basis
of knowledge or believed assumptions in advance. Contrast Knightian uncertainty.
Source: Used in Rosenberg (1996) in Mosaic of Economic Growth.
Arrow-Debreu equilibrium: Means, in practice, competitive equilibrium of the kind shown in Debreu's
Theory of Value.
The Arrow-Debreu reference may be to a particular paper: "Existence of an Equilibrium for a
Competitive Economy", Econometrica. Vol 22 July 1954, pp 265-290. I haven't checked that out.
Source: Debreu; Arrow and Debreu, 1954
Arrow-Pratt measure: An attribute of a utility function.
Denote a utility function by u(c). The Arrow-Pratt measure of absolute risk aversion is defined by:
RA=-u''(c)/u'(c)
This is a measure of the curvature of the utility function. This measure is invariant to affine
transformation of the utility function, which is a useful attributed because such transformation do not
affect the preferences expressed by u().

If RA() is decreasing in c, then u() displays decreasing absolute risk aversion. If R A() is increasing in c,
then u() displays increasing absolute risk aversion. If RA() is constant with respect to changes in c, then
u() displays constant absolute risk aversion.
Source: Huang and Litzenberger, 1988, p 21; for Arrow (1970) and Pratt (1964).
Contexts: finance; micro theory
ASQ: An abbreviation for the journal Administrative Science Quarterly which tends to be closer to
sociology than to economics.
Contexts: journals
ASR: An abbreviation for the journal American Sociological Review.
Contexts: journals
asset pricing models: A way of mapping from abstract states of the world into the prices of financial
assets like stocks and bonds. The prices are always conceived of as endogenous; that is, the states of the
world cause them, not the other way around, in an asset pricing model.
Several general types are discussed in the research literature. The CAPM is one, distinguished from
three that Fama (1991) identifies: (a) the Sharpe-Lintner-Black class of models, (b) the multifactor
models like the APT of Ross (1976), and (c) the consumption based models such as Lucas (1978).
An asset pricing model might or might not include the possibility of fads or bubbles.
Source: Fama, 1991, p 1590-1599

Contexts: finance
asset-pricing function: maps the state of the economy at time t into the price of a capital asset at time t.
Source: Sargent, 1987, Ch 3

Contexts: macro; finance; models
asymptotic: An adjective meaning 'of a probability distribution as some variable or parameter of it

(usually, the size of the sample from another distribution) goes to infinity.'
In particular, see asymptotic distribution.
Contexts: econometrics
asymptotic normality: A limiting distribution of an estimator is usually normal. (details!)
This is usually proven with a mean value expansion of the score at the estimated parameter value?
(details)
asymptotic variance: Definition of the asymptotic variance of an estimator may vary from author to
author or situation to situation. One standard definition is given in Greene, p 109, equation (4-39) and is
described there as "sufficient for nearly all applications." It's
asy var(t_hat) = (1/n) * limn->infinity E[ {t_hat - limn->infinity E[t_hat] }2 ]

Source: Greene, 1993, p 109

asymptotically equivalent: Estimators are asymptotically equivalent if they have the same asymptotic
distribution.
asymptotically unbiased: "There are at least three possible definitions of asymptotic unbiasedness:
1. The mean of the limiting distribution of n.5(t_hat - t) is zero.
2. limn->infinity E[t_hat] = t.
3. plim t_hat = t."
Usually an estimator will have all three of these or none of them. Cases exist however in which left hand
sides of those three are different. "There is no general agreement among authors as to the precise
meaning of asymptotic unbiasedness, perhaps because the term is misleading at the outset; asymptotic
refers to an approximation, while unbiasedness is an exact result. Nonetheless the majority view seems
to be that (2) is the proper definition of asymptotic unbiasedness. Note, though, that this definition relies
upon quantities that are generally unknown and that may not exist." -- Greene, p 107

attractor: a kind of steady state in a dynamical system. There are three types of attractor: stable steady
states, cyclical attractors, and chaotic attractors.
Source: J. Montgomery, social networks paper

Contexts: macro; models
augmented Dickey-Fuller test: A test for a unit root in a time series sample. An augmented Dickey-
Fuller test is a version of the Dickey-Fuller test for a larger and more complicated set of time series
models.
(Ed.: what follows is only my best understanding.) The augmented Dickey-Fuller (ADF) statistic, used
in the test, is a negative number. The more negative it is, the stronger the rejection of the hypothesis that
there is a unit root at some level of confidence. In one example, with three lags, a value of -3.17
constituted rejection at the p-value of .10.
Source: Greene, 1997

With thanks to: Don Watson (as of 1999/03/31: drw@matilda.vm.edu.au)
Austrian economics: A school of thought which "takes as its central concern the problem of human
coordination, through which order emerges not from a dictator, but from the decisions and judgments of
numerous individuals in a world of highly disperced and sometimes only tacit knowledge." -- Cass R.
Sunstein, "The Road from Serfdom" The New Republic Oct 20, 1997, p 42.
Well-known authors along this line include Carl Menger, Ludwig von Mises, and Friedrich von Hayek.
See Deborah L. Walker's essay for a clear account.
Source: Walker's essay at http://econlib.org/library/Enc/AustrianEconomics.html

Contexts: political
autarky: The state of an individual who does not trade with anyone.
Contexts: modelling
autocorrelation: the jth autocorrelation of a covariance-stationary process is defined as its jth

autocovariance divided by its variance.
In a sample, the kth autocorrelation is the OLS estimate that results from the regression of the data on
the kth lags of the data.
Below is Gauss code to calculate autocorrelations from a sample.
/* This functions calculates autocorrelation estimates for lag k */

proc autocor(series, k);
local rowz,y,x,rho;
rowz = rows(series);
y = series[k+1:rowz];
x = series[1:rowz-k];
rho = inv(x'x)*x'y; /* compute autocorrelation by OLS */
retp(rho);
endp;
autocovariance: The jth autocovariance of a stochastic process yt is the covariance between its time t
value and the value at time t-j. It is denoted  below, and E[] means expectation, or mean:
jt = E[(yt - Ey)(yt-j-Ey)]
In that equation the process is assumed to be covariance stationary. If there is a trend, then the second
Ey should be E(yt-j).
autocovariance matrix: Defined for a vector random process, denoted yt here. The ij'th element of the
autocovariance matrix is cov(y it, yj,t-k).
autoregressive process: See AR.
Contexts: econometrics; statistics; time series
avar: abbreviation or symbol for the operation of taking the asymptotic variance of an expression, thus:
avar().

average treatment effect: In a treatment model where some observations receive the treatment (for
example, a training program) and some do not, the average treatment effect is the difference between the
conditional expectation of the dependent variable with the treatment effect and the conditional
expectation of the dependent variable without the treatment effect. This is the average benefit from the
treatment.
Often this term is abbreviated ATE.
Source: source: John Pencavel, lecture notes for Econ 247, Stanford University, circa 2000-2005.
Contexts: estimation; labor
b: b(n,) is notation for a binomial distribution with parameters n and , where n is the number of draws
and  is the probability that each is a one; the value of X~b(n,) is a count of the number of ones drawn.
B1: B1 denotes the Borel sigma-algebra of the real line. It will contain every open interval by definition,
which implies that it contains every closed interval and every countable union of open, half-open, and
closed intervals. What won't it contain? In practice, only obscure sets. Here's an example: Define the
equivalence class ~ on the real line such that x~y (read: x is in the same equivalence class as y) if x-y is
a rational number. Now consider the set of all numbers in [0,1] such that none of them are in the same
equivalence class. How many members of that set are there? Well, it's not a countable number. This set
is not in B1.
Contexts: math; measure theory; real analysis
balance of payments: A country's balance of payments is the quantity of its own currency flowing out
of of the country (for purchases, for example, but also for gifts and intrafirm transfers) minus the amount
flowing in.
[Ed: this next part is partly speculation; feel free to correct it.] For some purposes this term refers to a
stock value and for others a flow value. It is well defined over a period in the sense that it has changed
from time A to time B.
Source: A macro model exhibits balanced growth if consumption, investment, and capital grow at at a
constant rate while hours of work per time period stays constant.
Source: Cooley, 1995, p 16

Contexts: macro; modelling
Banach space: Any complete normed vector space is a Banach space.
bandwidth: In kernel estimation, a scalar argument to the kernel function that determines what range of
the nearby data points will be heavily weighted in making an estimate. The choice of bandwidth
represents a tradeoff between bias (which is intrinsic to a kernel estimator, and which increases with
bandwidth), and variance of the estimates from the data (which decreases with bandwidth).
Cross-validation is one way to choose the bandwidth as a function of the data.

Has a variety of similar definitions in spectral analysis. Generally, a bandwidth is some way of defining
the range of frequencies that will be included by the estimation process. In some estimations it is an
argument to the estimation process.
Source: Hardle, 1990, especially p 148

Contexts: econometrics; statistics
bank note: In periods of free banking, such as most states in the U.S. from 1839-1863, banks could
issue their own money, called bank notes. A bank note was a risky, perpetual debt claim on a bank
which paid no interest, and could be redeemed on demand at the original bank, usually in gold. There
was a risk that the bank would not be able or willing to redeem it.
Contexts: money; history
barter economy: An economy that does not have a medium of exchange, or money, and where trade
occurs instead by exchanging useful goods for useful goods.
Source: McCallum, 1983

Contexts: money; models
base point pricing: The practice of firms setting prices as if their transportation costs to all locations
were the same, even if all the vendors are distant from one another and have substantially different costs
of transportation to each location. One might interpret this as a form of monitored collusion between the
vendor firms.
Contexts: IO
basin of attraction: the region of states, in a dynamical system, around a particular stable steady state,
that lead to trajectories going to the stable steady state. (E.g. the region inside the event horizon around a
black hole.)
Source: James Montgomery, social networks paper

basis point: One-hundredth of a percentage point. Used in the context of interest rates.
Contexts: finance; business
basket: A known set of fixed quantites of known goods, needed for defining a price index.
Contexts: macro; price indexes
Bayesian analysis: "In Bayesian analysis all quantities, including the parameters, are random variables.
Thus, a model is said to be identified in probability if the posterior distribution for [the parameter to be
estimated] is proper."
Source: Hsiao, The New Palgrave: Econometrics, p 98

Bellman equation: Any value or flow value equation. For a discrete problem it can generally be of the
form:

v(k) = max over k' of { u(k,k') + *v(k') }

where:
u() is the one-period return function (e.g., a utility function) and
v() is the value function and
k is the current state and
k' is the state to be chosen and
 is a scalar real parameter, the discount rate, generally slightly less than one.
Contexts: dynamic optimization; macro; models
Bertrand competition: A bidding war in which the bidders end up at a zero-profit price. See Bertrand
game.
Contexts: game theory; IO
Bertrand duopoly: The two firms producing in a market modeled as a Bertrand game.
Contexts: IO
Bertrand game: Model of a bidding war between firms each of which can offer to sell a certain good
(say, widgets), but no other firms can. Each firm may choose a price to sell widgets at, and must then
supply as many as are demanded. Consumers are assumed to buy the cheaper one, or to purchase half
from each if the prices are the same. Best for the firms (both collectively and individually) is to
cooperate, charge monopoly price, and split the profits. Each firm could seize the whole market by
lowering price slightly, however, and the noncooperative Nash equilibrium outcome of a Bertrand game
is that both charge a zero-profit price.
Beveridge curve: The graph of the inverse relation of unemployment to job vacancies.
BHHH: A numerical optimization method from Berndt, Hall, Hall, and Hausman (1974). Used in
Gauss, for example. The following discussion of BHHH was posted to the newsgroup sci.econ.research
by Paul L. Schumann, Ph.D., Professor of Management at Minnesota State University, Mankato
(formerly Mankato State University). It is included here without any explicit permission whatsoever.
BHHH usually refers to the procedure explained in Berndt, E., Hall, B.,
Hall, R., & Hausman, J. (1974), "Estimation and Inference in Nonlinear
Structural Models," Annals of Economic and Social Measurement, 3/4: 653-665.
BHHH provides a method of estimating the asymptotic covariance matrix of a

Maximum Likelihood Estimator. In particular, the covariance matrix for a MLE
depends on the second derivatives of the log-likelihood function. However,
the second derivatives tend to be complicated nonlinear functions. BHHH
estimates the asymptotic covariance matrix using first derivatives instead
of analytic second derivatives. Thus, BHHH is usually easier to compute than
other methods.
In addition to the original BHHH article referenced above, BHHH is also

discussed in Greene, W.H., Econometric Analysis, 3rd Edition, Prentice-Hall,

1997. Greene's econometric software program, LIMDEP, uses BHHH for some of
the estimation routines.
Someone (perhaps BHHH themselves?) wrote a Fortran subroutine in the 1970's

to do BHHH. I do not have a copy of this subroutine at the present time. You
may want to check out Green's econometric software, LIMDEP, to see if it
will do what you require, rather than writing your own program to use an
existing BHHH subroutine. The Web address for LIMDEP is:
http://www.limdep.com/index.htm
Cheers,
Paul.
--
Paul L. Schumann, Ph.D., Professor of Management
Minnesota State University, Mankato (formerly Mankato State University)
Mankato, MN 56002
mailto:paul.schumann@mankato.msus.edu
http://krypton.mankato.msus.edu/~schumann/www/welcome.html
Source: Gauss Applications: Maximum Likelihood; Berndt, Hall, Hall, and Hausman (1974)
With thanks to: Paul L. Schumann, Ph.D., Professor of Management
Minnesota State University, Mankato (formerly Mankato State University)
Mankato, MN 56002
mailto:paul.schumann@mankato.msus.edu
http://krypton.mankato.msus.edu/~schumann/www/welcome.html
Contexts: numerical methods; estimation
BHPS: British Household Panel Survey. A British government database going back to 1990. Web page:
http://www.iser.essex.ac.uk/bhps/index.php
bias: the difference between the parameter and the expected value of the estimator of the parameter.
bidding function: In an auction analysis, a bidding function (often denoted b()) is a function whose
value is the bid that a particular player should make. Often it is a function of the player's value, v, of the
good being auctioned. Thus the common notation b(v).
Contexts: micro theory; IO
bill of exchange: From the late Middle Ages. A contract entitling an exporter to receive immediate
payment in the local currency for goods that would be shipped elsewhere. Time would elapse between
payment in one currency and repayment in another, so the interest rate would also be brought into the
transaction.
Source: Glasner, p. 23
Contexts: history; money

billon: A mixture of silver and copper, from which small coins were made in medieval Europe. Larger
coins were made of silver or gold.
Source: Thomas J Sargent and Francois R Velde, 1997, "The Evolution of Small Change", unpublished
paper, p. 6
bimetallism: A commodity money regime in which there is concurrent circulation of coins made from
each of two metals and a fixed exchange rate between them. Historically the metals have almost always
been gold and silver. Bimetallism was tried many times with varying success but since about 1873 the
practice has been generally abandoned.
Source: Velde, Francois R., and Warren E. Weber. 1998. "A Model of Bimetallism." Working paper,
Federal Reserve Bank of Chicago, Federal Reserve Bank of Minneapolis, and University of Minnesota.
page 2.
Contexts: money
BJE: Bell Journal of Economics, the previous name of the RAND Journal of Economics or RJE.
Contexts: journals
Black-Scholes equation: An equation for option securities prices on the basis of an assumed stochastic
process for stock prices.
The Black-Scholes algorithm can produce an estimate the value of a call on a stock, using as input:
-- an estimate of the risk-free interest rate now and in the near future
-- current price of the stock
-- exercise price of the option (strike price)
-- expiration date of the option
-- an estimate of the volatility of the stock's price
Click here for a derivation of Black-Scholes equation. From the Black-Scholes equation one can derive
the price of an option.
Click here for a simplified derivation which assumes risk-neutrality.
BLS: Abbrevation for the U.S. government's Bureau of Labor Statistics, in the Labor Department.
Contexts: data
Bonferroni criterion: Suppose a certain treatment of a patient has no effect. If one runs a test of
statistical significance on enough randomly selected subsets of the patient base, one would find some
subsets in which statistically significant differences were apparently distinguished by the treatment. The
Bonferroni criterion is a redefinition of the statistical signficance criterion for the testing of many
subgroups: e.g. if there are five subgroups and one of them shows an effect of the treatment at the .01
significance level, the overall finding is significant at the .05 level. This is discussed in more detail (and
probably more correctly) in Bland and Altman (1995) in the statistics notes of the British Medical
Journal. Either of these links should go there:
Llink 1.
Link 2; search for Bonferroni.

Source: British Medical Journal, statistics notes by Bland and Altman.

Contexts: statistics; epidemiology
bootstrapping: The activity of applying estimators to each of many subsamples of a data sample, in the
hope that the distribution of the estimator applied to these subsamples is similar to the distribution of the
estimator when applied to the distribution that generated the sample.
It is a method that gives a sense of the sampling variability of an estimator. "After the set of coefficients
b0 is computed, M randomly drawn samples of T observations are drawn from the original data set with
replacement. T may be less than or equal to n, the sample size. With each such sample the ... estimator is
recomputed." -- Greene, p 658-9.
The properties of this distribution of estimates of b0 can then be characterized, e.g. its variance. If the
estimates are highly variable, the investigator knows not to think of the estimate of b0 as precise.
Bootstrapping could also be used to estimate by simulation, or empirically, the variance of an estimation
procedure for which no algebraic expression for the variance exists.
Source: Greene, 1993, p 658-9

Contexts: econometrics; estimation; statistics
Borel set: Any element of a Borel sigma-algebra.
Borel sigma-algebra: The Borel sigma-algebra of a set S is the smallest sigma-algebra of S that
contains all of the open balls in S. Any element of a Borel sigma-algebra is a Borel set.
Example: The set B1 is the Borel sigma-algebra of the real line, and thus contains every open interval.
Example: Consider a filled circle in the unit square. It can be constructed by a countable number of non-
overlapping open rectangles (since a series of such rectangles can be defined that would cover every
point in the circle but no point outside of it. Therefore it is in the smallest sigma-algebra of open subsets
of the unit square.
bounded rationality: Models of bounded rationality are defined in a recent book by Ariel Rubinstein as
those in which some aspect of the process of choice is explicitly modeled.
Source: Rubinstein, Ariel. 1998. Modeling Bounded Rationality.

Contexts: game theory; micro theory
Box-Cox transformation: The Box-Cox transformation, below, can be applied to a regressor, a

combination of regressors, and/or to the dependent variable in a regression. The objective of doing so is
usually to make the residuals of the regression more homoskedastic and closer to a normal distribution:
{ y() = ((y^) - 1) /  for  not equal to zero

y()=log(y) =0
Box and Cox (1964) developed the transformation.
Estimation of any Box-Cox parameters is by maximum likelihood.
Box and Cox (1964) offered an example in which the data had the form of survival times but the
underlying biological structure was of hazard rates, and the transformation identified this.
Source: Box and Cox, 1964; Stata 7 manual entry for boxcox; Davidson and Mackinnon, 1993, pp 481-
488.
Box-Jenkins: A "methodology for identifying, estimating, and forecasting" ARMA models. (Enders,
1996, p 23). The reference in the name is to Box and Jenkins, 1976.

Box-Pierce statistic: Defined on a time series sample for each natural number k by the sum of the
squares of the first k sample autocorrelations. The kth sample autocorrelation is denoted :
BP(k)=s=1 k [s2]
Used to tell if a time series is nonstationary.
Below is Gauss code with a procedure that calculates the Box-Pierce statistic for a set of residuals.
/* A series of residuals eps_hat[] is generated from a regression, e.g.: */
eps_hat = y - X*betaols;
/* Then the Box-Pierce statistic for each k can be calculated this way: */
print "Box-Pierce statistic for k=1 is" BP(eps_hat,1);

proc BP(series, k);

local beep, rho;
beep = 0;
do until k < 1;
rho = autocor(series, k);
beep = beep + rho * rho;
k = k - 1;
endo;
beep = beep * rows(series); /* BP = T* (the sum) */
retp(beep);
endp;
/* This functions calculates autocorrelation estimates for lag k */

proc autocor(series, k);
local rowz,y,x,rho;
rowz = rows(series);
y = series[k+1:rowz];
x = series[1:rowz-k];
rho = inv(x'x)*x'y; /* compute autocorrelation by OLS */
retp(rho);

endp;
Contexts: finance, time series
BPEA: An abbreviation for the Brookings Papers on Economic Activity.
Brent method: An algorithm for choosing the step lengths when numerically calculating maximum
likelihood estimates.
Source: Gauss Applications: Maximum Likelihood

; Brent, 1972
Contexts: numerical methods; estimation
Bretton Woods system: The international monetary framework of fixed exchange rates after World
War II. Drawn up by the U.S. and Britain in 1944. Keynes was one of the architects. The meetings
occurred at Bretton Wood, New Hampshire, in the U.S., in July 1944. The International Bank for
Reconstruction and Development, now called the World Bank, was planned at the meetings. So was the
International Monetary Fund or IMF.
The system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed
price of $35/ounce. At that point for the first time in history, formal links between the major world
currencies and real commodities were severed.
Source: Glasner, p 157-160;

The International Forum on Globalization. Alternatives to Economic Globalization. 2002. p.18
Breusch-Pagan statistic: A diagnostic test of a regression. It is a statistic for testing whether dependent
variable y is heteroskedastic as a function of regressors X. If it is, that suggests use of GLS or SUR
estimation in place of OLS. The test statistic is always nonnegative. Large values of test statistic reject
the hypothesis that y is homoskedastic in X. The meaning of 'large' varies with the number of variables
in X.
Quoting almost directly from the Stata manual: The Breusch and Pagan (1980) chi-squared statistic -- a
Lagrange multiplier statistic -- is given by
 = T * [m=1 m=M [n=1n=m-1 [rmn 2 ]]
where rmn 2 is the estimated correlation between the residuals of the M equations and T is the number of
observations. It has a chi-squared distribution with M(M-1)/2 degrees of freedom.
Source: Breusch, T. and A. Pagan. 1980. "The LM test and its applications to model specification in
econometrics." Review of Economic Studies. 47: 239-254.
StataCorp. 1999. Stata statistical software release 6.0 manual, vol 4., page 14.

Contexts: estimation; econometrics
bubble: A substantial movement in market price away from a price determined by fundamental value.
In practice, "bubble" always refers to a situation where the market price is higher than the conjectured
fundamentally supported price. The idea of a fundamental value requires some model or outside
knowledge of what the security (or other good) is worth.
Bubbles are often described as speculative and it is conjectured that bubbles could be risky ventures for
speculators who earn a fair rate of return on them. [ed: I believe these are "rational" bubbles.]
There exist statistical models of a bubbles. For example, stochastic collapsing bubbles are cited to
Blanchard and Watson (1982) -- in this form, "the bubble continues with a certain conditional
probability and collapses otherwise."
Source: Bollerslev and Hodrick (1992), p 15;
For more discussion of the definition and a history of examples, see:

Garber, Peter M. 2000. Famous First Bubbles. MIT Press.
especially its introduction. And academic articles by Garber too.
Contexts: finance
budget: A budget is a description of a financial plan. It is a list of estimates of revenues to and

expenditures by an agent for a stated period of time. Normally a budget describes a period in the future
not the past.
budget line: A consumer's budget line characterizes on a graph the maximum amounts of goods that the
consumer can afford. In a two good case, we can think of quantities of good X on the horizontal axis and
quantities of good Y on the vertical axis. The term is often used when there are many goods, and without
reference to any actual graph.
Contexts: micro theory; phrases
budget set: The set of bundles of goods an agent can afford. This set is a function of the prices of goods
and the agents endownment.
Assuming the agent cannot have a negative quantity of any good, the budget set can be characterized
this way. Let e be a vector representing the quantities of the agent's endowment of each possible good,
and p be a vector of prices for those goods. Let B(p,e) be the budget set. Let x be an element of R+L;
that is, the space of nonnegative reals of dimension L, the number of possible goods. Then:
B(p,e) = {x: px <= pe}
Contexts: general equilibrium; models
bureaucracy: A form of organization in which officeholders have defined positions and (usually) titles.
Formal rules specify the duties of the officeholders. Personalistic distinctions are usually discouraged by
the rules.

Burr distribution: Has density function (pdf):

f(x) = ckxc-1(1+xc)k+1 for constants c>0, k>0, and for x>0.
Has distribution function (cdf): F(x) = 1 - (1+xc)-k.
Source: Maddala, 1983/96, p 10-11; Burr, 1942

business:
Relevant terms: basis point, Black-Scholes equation, call option, conglomerate, coupon strip, EBITDA,
ex dividend date, NASDAQ, NYSE, option, principal strip, pro forma, put option, reinsurance.
Contexts: fields
business cycle frequency: Three to five years. Called the business cycle frequency by Burns and
Mitchell (1946), and this became standard language.
Source: Cooley, 1995, p 28

Contexts: macro
BVAR: Bayesian VAR (Vector Autoregression)
Contexts: time series; econometrics; estimation
CAGR: Cumulative Average Growth Rate
calculus of voting: A model of political voting behavior in which a citizen chooses to vote if the costs
of doing so are outweighed by the strength of the citizen's preference for one candidate weighted by the
anticipated probability that the citizen's vote will be decisive in the election.
Source: Downs, 1957; Riker and Ordeshook, 1968

calibration: NOT SURE WHICH OF THESE (IF EITHER) IS RIGHT:

1. The estimation of some parameters of a model, under the assumption that the model is correct, as a
middle step in the study of other parameters. Use of this word suggests that the investigator wishes to
give those other parameters of the model a 'fair chance' to describe the data, not to get stuck in a side
discussion about whether the calibrated parameters are ideally modeled or estimated.
2. Taking parameters that have been estimated for a similar model into one's own model, solving one's
own model numerically, and simulating. Attributed to Edward Prescott.
call option: A call option conveys the right to buy a specified quantity of an underlying security.
capital: Something owned which provides ongoing services. In the national accounts, or to firms,
capital is made up of durable investment goods, normally summed in units of money. Broadly: land plus

physical structures plus equipment. The idea is used in models and in the national accounts.
See also human capital and social capital.
Contexts: macro; IO
capital consumption: In national accounts, this is the amount by which gross investment exceeds net
investment. It is the same as replacement investment.
-- Oulton (2002, p. 13)
Source: Oulton, Nicholas. 2002. "Productivity versus welfare: or GDP versus Weitzman's NDP." Bank
of England. On the web.
Contexts: macro; measurement; government
capital deepening: Increase in capital intensity, normally in a macro context where it is measured by
something analogous to the capital stock available per labor hour spent. In a micro context, it could
mean the amount of capital available for a worker to use, but this use is rare.
Capital deepening is a macroeconomic concept, of a faster-growing magnitude of capital in production

than in labor. Industrialization involved capital deepening - that is, more and more expensive equipment
with a lesser corresponding rise in wage expenses.
Capital deepening has been measured by a rising ratio of some kind of capital in production, or services
provided by capital to production, to total output. Capital may include land, structures, equipment, or the
relevant capital may be a more narrowly defined input (e.g. a computer equipment).
Source: Oulton, Nicholas. 2002. "Productivity versus welfare: or GDP versus Weitzman's NDP." Bank
of England. page 31. On the Web.
Margo, Atack, and others on US national growth 1850-1880. ~2003 NBER paper.
Contexts: macro
capital intensity: Amount of capital per unit of labor input.
capital ratio: A measure of a bank's capital strength used by U.S. regulatory agencies.
Contexts: money; banking
capital structure: The capital structure of a firm is broadly made up of its amounts of equity and debt.
Contexts: finance
capital-augmenting: One of the ways in which an effectiveness variable could be included in a

production function in a Solow model. If effectiveness A is multiplied by capital K but not by labor L,
then we say the effectiveness variable is capital-augmenting.
For example, in the model of output Y where Y=(AK) aL1-a the effectiveness variable A is capital-
augmenting but in the model Y=AKaL1-a it is not.
Another example would be a capital utilization variable as measured say by electricity usage. (E.g., as in
Eichenbaum). ----------------- An example: in the context of a railroad, automatic railroad signaling,
track-switching, and car-coupling devices are capital-augmenting. From Moses Abramovitz and Paul A.

David, 1996. "Convergence and Deferred Catch-up: productivity leadership and the waning of American
exceptionalism." In Mosaic of Economic Growth, edited by Ralph Landau, Timothy Taylor, and Gavin
Wright.
Source: Romer, 1996, p 7

Contexts: macro
capitation: The system of payment for each customer served, rather than by service performed. Both are
used in various ways in U.S. medical care.
Source: Weisbrod's class circa 5/21/97

Contexts: public
CAPM: Capital Asset Pricing Model
CAR: stands for Cumulative Average Return.
A portfolio's abnormal return (AR) at each time is AR t=Sum from i=1 to N of each arit/N. Here arit is
the abnormal return at time t of security i.
Over a window from t=1 to T, the CAR is the sum of all the ARs.
Contexts: finance
CARA utility: A class of utility functions. Also called exponential utility. Has the form, for some
positive constant a:
u(c)=-(1/a)e-ac
"Under this specification the elasticity of marginal utility is equal to -ac, and the instantaneous elasticity
of substitution is equal to 1/ac."
The coefficient of absolute risk aversion is a; thus the abbreviation CARA for Constant Absolute Risk
Aversion. "Constant absolute risk aversion is usually thought of as a less plausible description of risk
aversion than constant relative risk aversion" (that's the CRRA, which see), but it can be more
analytically convenient.
Source: Blanchard and Fischer, p. 44

Contexts: models
CARs: cumulative average adjusted returns
Contexts: finance
cash-in-advance constraint: A modeling idea. In a basic Arrow-Debreu general equilibrium there is no

need for money because exchanges are automatic, through a Walrasian auctioneer. To study monetary
phenomena, a class of models was made in which money was required to make purchases of other
goods. In such a model the budget constraint is written so that the agent must have enough cash on hand
to make any consumption purchase. Using this mechanism money can have a positive price in
equilibrium and monetary effects can be seen in such models. Contrast money-in-the-utility function for
an alternative modeling approach.

Source: Ostroy and Starr, 1990, pp 6-7

catch-up: "'Catch-up' refers to the long-run process by which productivity laggards close the
proportional gaps that separate them from the productivity leader .... 'Convergence,' in our usage, refers
to a reduction of a measure of dispersion in the relative productivity levels of the array of countries
under examination." Like Barro and Sala-i-Martin (92)'s "sigma-convergence", a narrowing of the
dispersion of country productivity levels over time.
Source: From Moses Abramovitz and Paul A. David, 1996. "Convergence and Deferred Catch-up:
productivity leadership and the waning of American exceptionalism." In Mosaic of Economic Growth,
edited by Ralph Landau, Timothy Taylor, and Gavin Wright.
Contexts: international; macro
Cauchy distribution: Has thicker tails than a normal distribution.

density function (pdf): f(x) = 1/[pi*(1+x2)]. distribution function (cdf): F(x) = .5 + (tan-1x)/pi.
> 
 
Source: Maddala, p. 9 
Contexts: econometrics; statistics 
 
Cauchy sequence:<a name=

A sequence satisfies the Cauchy criterion iff for each positive
real epsilon there exists a natural number N such that the distance between any two elements of the
sequence past the Nth element is less than epsilon. 'Distance' must be defined in context by the user of
the term.
One sometimes hears the construction: 'The sequence is Cauchy' if the sequence satisfies the definition.
Source: Stokey and Lucas, 1989

CCAPM: Stands for Consumption-based Capital Asset Pricing Model.

A theory of asset prices. Formulated in Lucas, 1978, and Breeden, 1979.
Source: Lucas, 1978; Breeden, 1979

Contexts: finance; macro
CDE: Stands for Corporate Data Exchange, an organization which has data on the shareholdings of
large U.S. companies.
Source: Weisbach, 1988, p 448

Contexts: finance
cdf: cumulative distribution function. This function describes a statistical distribution. It has the value,
at each possible outcome, of the probability of receiving that outcome or a lower one. A cdf is usually
denoted in capital letters. Consider for example some F(x), with x a real number is the probability of
receiving a draw less than or equal to x. A particular form of F(x) will describe the normal distribution,
or any other unidimensional distribution.

CDFC: Stands for Concavity of distribution function condition.
Contexts: micro theory
censored dependent variable: A dependent variable in a model is censored if observations of it cannot

be seen when it takes on vales in some range. That is, the independent variables are observed for such
observations but the dependent variable is not.
A natural example is that if we have data on consumers and prices paid for cars, if a consumer's
willingness-to-pay for a car is negative, we will see observations with consumer information but no car
price, no matter how low car prices go in the data. Price observations are then censored at zero.
Contrast truncated dependent variables.
central bank: A government bank; a bank for banks.
Source: Mark Witte, (mwitte@nwu.edu).

Contexts: money; macro
certainty equivalence principle: Imagine that a stochastic objective function is a function only of
output and output-squared. Then the solution to the optimization problem of choosing output will have
the special characteristic that only the conditional means of the future forcing variables appear in the
first order conditions. (By conditional means is meant the set of means for each state of the world.) Then
the solution has the "certainty equivalence" property. "That is, the problem can be separated into two
stages: first, get minimum mean squared error forecasts of the exogenous [variables], which are the
conditional expectations...; second, at time t, solve the nonstochastic optimization problem," using the
mean in place of the random variable. "This separation of forecasting from optimization.... is
computationally very convenient and explains why quadratic objective functions are assumed in much
applied work. For general [functions] the certainty equivalence principle does not hold, so that the
forecasting and opt problems do not 'separate.'"
Source: Sargent, 1979, Ch 14, p 396

certainty equivalent: The amount of payoff (e.g. money or utility) that an agent would have to receive
to be indifferent between that payoff and a given gamble is called that gamble's 'certainty equivalent'.
For a risk averse agent (as most are assumed to be) the certainty equivalent is less than the expected
value of the gamble because the agent prefers to reduce uncertainty.
Contexts: micro theory; finance
CES production function: CES stands for constant elasticity of substitution. This is a function
describing production, usually at a macroeconomic level, with two inputs which are usually capital and
labor. As defined by Arrow, Chenery, Minhas, and Solow, 1961 (p. 230), it is written this way:
V = (K- + L-) -(1/)

where V = value-added, (though y for output is more common),

K is a measure of capital input,
L is a measure of labor input,
and the Greek letters are constants. Normally >0 and >0 and >-1. For more details see the source
article.
In this function the elasticity of substitution between capital and labor is constant for any value of K and
L. It is (1+)-1.
Source: Defined and discussed in Arrow, Chenery, Minhas, and Solow, 1961.
CES technology: Example, adapted from Caselli and Ventura:

For capital k, labor input n, and constant b<?? (?less that what?)
f(k,n) = (kb + nb)1/b
Here the elasticity of substitution between capital and labor is less than one, i.e. 1/(1-b)<1.
Source: "A Representative Consumer Theory of Distribution" by Francesco Caselli and Jaume Ventura,
working paper dated April, 1996 presented at Summer Macro Conference at Northwestern University
circa July 28, 1996
Contexts: models
CES utility: Stands for Constant Elasticity of Substitution, a kind of utility function. A synonym for
CRRA or isoelastic utility function. Often written this way, presuming a constant g not equal to one:
u(c)=c1-g/(1-g)
This limits to u(c)=ln(c) as g goes to one.
The elasticity of substitution between consumption at any two points in time is constant, equal to 1/g.
"The elasticity of marginal utility is equal to" -g. g can also be said to be the coefficient of relative risk
aversion, defined as -u"(c)c/u'(c), which is why this function is also called the CRRA (constant relative
risk aversion) utility function.
Source: Blanchard and Fischer, p. 44

ceteris paribus: means "assuming all else is held constant". The author is attempting to distinguish an
effect of one kind of change from any others.
Contexts: phrases
CEX: Abbreviation for the U.S. government's Consumer Expenditure Survey
Contexts: data
CFTC: The U.S. government's Commodities and Futures Trading Commission.
CGE: An occasional abbreviation for "computable general equilibrium" models.
Contexts: models

chained: Describes an index number that is frequently reweighted. An example is an inflation index
made up of prices weighted by frequency with which they are paid, and frequent recomputation of
weights makes it a chained inded.
Source: Hulten, 2000

Contexts: index numbers
chaotic: A description of a dynamic system that is very sensitive to initial conditions and may evolve in
wildly different ways from slightly different initial conditions.
Source: Devaney, 1992, p 1-2

Contexts: mathematics; dynamic optimization
characteristic equation: polynomial whose roots are eigenvalues
Contexts: linear algebra
characteristic function: Denoted here PSI(t) or PSIX(t). Is defined for any random variable X with a
pdf f(x). PSI(t) is defined to be E[eitX], which is the integral from minus infinity to infinity of e itXf(x).
This is also the cgf, or cumulant generating function. "Every distribution has a unique characteristic
function; and to each characteristic function there corresponds a unique distribution of probability." --
Hogg and Craig, p 64
Source: Hogg and Craig, 1995, p 64

characteristic root: Synonym for eigenvalue.
chartalism: or "state theory of money" -- 19th century monetary theory, based more on the idea that
legal restrictions or customs can or should maintain the value of money, not intrinsic content of valuable
metal.
Source: Thomas J Sargent and Francois R Velde, 1997, "The Evolution of Small Change", unpublished
paper, p. 27
chi-square distribution: A continuous distribution, with natural number parameter r. Is the distribution
of sums of squares of r standard normal variables. Mean is r, variance is 2r, pdf and cdf is difficult to
express in html, and moment-generating function (mgf) is (1-2t)-r/2.
From older definition in this same database: If n random values z 1, z2, ..., zn are drawn from a standard
normal distribution, squared, and summed, the resulting statistic is said to have a chi-squared
distribution with n degrees of freedom: z 12 + z22 + ... + z n2) ~ X2(n) This is a one-parameter family of
distributions, and the parameter, n, is conventionally labeled the degrees of freedom of the distribution. -
- quoted and paraphrased from Johnston See also noncentral chi-squared distribution
Source: Hogg and Craig; Johnston (p. 530 in older edition?)

Chicago School: Refers to an perspective on economics of the University of Chicago circa 1970.
Variously interpreted to imply:
1) A preference for models in which information is perfect, and an associated search for empirical
evidence that choices, not institutional limitations, are what result in outcomes for people. (E.g., that
committing crime is a career choice; that smoking represents an informed tradeoff between health risk
and immediate gratification.)
2) That antitrust law is rarely necessary, because potential competition will limit monopolist abuses.
Contexts: phrases
choke price: The lowest price at which the quantity demanded is zero.
Cholesky decomposition: Given a symmetric positive definite square matrix X, the Cholesky
decomposition of X is the factorization X=U'U, where U is the square root matrix of X, and satisfies:
(1) U'U = X
(2) U is upper triangular (that is, it has all zeros below the diagonal) Once U has been computed, one can
calculate the inverse of X more easily, because X-1 = U-1(U')-1, and the inverses of U and U' are easier
to compute.
Source: Greene, 1993, p 36; Gauss help system, under CHOL(), which finds U given X
Contexts: econometrics; linear algebra
Cholesky factorization: Same as Cholesky decomposition.

Chow test: A particular test for structural change; an econometric test to determine whether the
coefficients in a regression model are the same in separate subsamples. In reference to a paper of G.C.
Chow (1960), "the standard F test for the equality of two sets of coefficients in linear regression models"
is called a Chow test. See derivation and explanation in Davidson and MacKinnon, p. 375-376. More
info in Greene, 2nd edition, p 211-2.
Homoskedasticity of errors is assumed although this can be dubious since we are open to the possibility
that the parameter vector () has changed.
RSSR = the sum of squared residuals from a linear regression in which 1 and 2 are assumed to be the
same
SSR1 = the sum of squared residuals from a linear regression of sample 1
SSR2 = the sum of squared residuals from a linear regression of sample 2
 has dimension k, and there are n observations in total
Then the F statistic is:
((RSSR-SSR1-SSR2)/k ) / ((SSR1+SSR2)/(n-2k).
That test statistic is the Chow test.
Source: Davidson and MacKinnon, 1993, p 375

circulating capital: flows of value within a production organization. Includes stocks of raw material,
work in process, finished goods inventories, and cash on hand needed to pay workers and suppliers
before products are sold.
Source: unpublished dissertation, Thomas Geraghty, at Northwestern Univ, 1998

With thanks to: Thomas M. Geraghty, (t-geraghty@nwu.edu)
Contexts: IO
CJE: An abbreviation for the Canadian Journal of Economics.
CLAD: Stands for the "Censored Least Absolute Deviations" estimator. If errors are symmetric (with
median of zero), this estimator is unbiased and consistent though not efficient. The errors need not be
homoskedastic or normally distributed to have those attributes.
CLAD may have been defined for the first time in Powell, 1984.
Source: statalist [email discussion list for Stata] and other unpublished sources
classical: According to Lucas (1998), a classical theory would have no explicit reference to preferences.
Contrast neoclassical.
Source: Lucas (1998)

Contexts: phrases; macro theory
Clayton Act: A 1914 U.S. law on the subject of antitrust and price discrimination.
Section two prohibits price discrimination.
Section three prohibits sales based on an exclusive dealing contract requirement that may have the effect
of lessening competition.
Section seven prohibits mergers where "the effect of such acquisition may be substantially to lessen
competition, or tend to create a monopoly" in any line of commerce.
Source: lectures and handouts of Michael Whinston at Northwestern U in Economics D50, Winter 1998
Contexts: IO; antitrust; regulation
clears: A verb. A market clears if the vector of prices for goods is such that the excess demand at those
prices is zero. That is, the quantity demanded of every good at those prices is met.
Contexts: general equilibrium; modelling
climacteric: Critical stage, period, or turning point, usually away from an upward, expansive, or
optimistic path into a downward or quiescent direction. Has been used in the context of declining British
economic success after 1890.
Source: dictionary
Contexts: economic history; phrases
cliometrics: the study of economic history; the 'metrics' at the end was put to emphasize (possibly

humorously) the frequent use of regression estimation.
"The cliometric contribution was the application of a systematic body of theory -- neoclassical theory --
to history and the application of sophisticated, quantitative techniques to the specification and testing of
historical models." -- North (1990/1993) p 131.
Source: North, 1990

Contexts: history; fields
clustered data: Data whose observations are not iid but rather come in clusters that are correlated
together -- e.g. a data set of individuals some of whom are siblings of others, and are therefore similar
demographically.
Contexts: data
Coase theorem: Informally: that in presence of complete competitive markets and the absence of
transactions costs, an efficient set of inputs to production and outputs from production will be chosen by
agents regardless of how property rights over the inputs were assigned to the agents. A detailed
discussion is in the Encyclopedia of Law and Economics, online.
Contexts: public economics
Cobb-Douglas production function: A standard production function which is applied to describe much
output two inputs into a production process make. It is used commonly in both macro and micro
examples.
For capital K, labor input L, and constants a, b, and c, the Cobb-Douglas production function is
f(k,n) = bkanc
If a+c=1 this production function has constant returns to scale. (Equivalently, in mathematical language,
it would then be linearly homogenous.) This is a standard case and one often writes (1-a) in place of c.
Log-linearization simplifies the function, meaning just that taking logs of both sides of a Cobb-Douglass
function gives one better separation of the components.
In the Cobb-Douglass function the elasticity of substitution between capital and labor is 1 for all values
of capital and labor.
With thanks to: Nelson Noya

Contexts: models
cobweb model: A theoretical model of an adjustment process that on a price/quantity or supply/demand

graph spirals toward equilibrium.
Example, from Ehrenberg and Smith: Suppose the equilibrium labor market wage for engineers is stable
over a ten-year period, but at the beginning of that period the wage is above equilibrium for some
reason. Operating on the assumption, let's say, that engineering wages will remain that high, too many
students then go into engineering. The wage falls suddenly from oversupply when that population
graduates. Too few students then choose engineering. Then there is a shortage following their
graduation. Adjustment to equilibrium could be slow.

"Critical to cobweb models is the assumption that workers form myopic expectations about the future
behavior of wages." "Also critical to cobweb models is that the demand curve be flatter than the supply
curve; if it is not, the cobweb 'explodes' when demand shifts and an equilibrium wage is never reached."
Source: Ehrenberg and Smith, 1994, p 292-3

Contexts: labor; models
Cochrane-Orcutt estimation: An algorithm for estimating a time series linear regression in the
presence of autocorrelated errors. The implicit citation is to Cochrane-Orcutt (1949).
The procedure is nicely explained in the SHAZAM manual section online at the SHAZAM web site.
Their procedure includes an improvement to include the first observation attributed to the Prais-Winsten
transformation. A summary of their excellent description is below. This version of the algorithm can
handle only first-order autocorrelation but the Cochrane-Orcutt method could handle more.
Suppose we wish to regress y[t] on X[t] in the presence of autocorrelated errors. Run an OLS regression
of y on X and construct a series of residuals e[t]. Regress e[t] on e[t-1] to estimate the autocorrelation
coefficient, denoted p here. Then construct series y * and X* by: y*1 = sqrt(1-p2)y1,
X*1 = sqrt(1-p2)X1,
and
y*t = yt - pyt-1,
X*t = Xt - pXt-1
One estimates b in y=bX+u by applying this procedure iteratively -- renaming y* to y and X* to X at

each step, until estimates of p have converged satisfactorily.
Using the final estimate of p, one can construct an estimate of the covariance matrix of the errors, and
apply GLS to get an efficient estimate of b.
Transformed residuals, the covariance matrix of the estimate of b, R 2, and so forth can be calculated; see
source.
Source: SHAZAM manual

Contexts: estimation; time series; econometrics
coefficient of absolute risk aversion: This is a measure of the responsiveness to risk implied by a
utility function of consumption, for each consumption level. Thus it is an attribute of a model, not an
empirical measure usually.
It is defined by RA(c) = -u''(c) / u'(c).
If RA(c) is constant for all c, and there are only two possible investments, a risky one and a risk-free
one, the amount of investment in the one risky asset is constant for all c.
See also coefficient of relative risk aversion, which is cRA(c).

Source: Huang and Litzenberger, p. 20

Contexts: finance; models; utility
coefficient of determination: Same as R-squared.

coefficient of relative risk aversion: This is a measure of the responsiveness to risk implied by a utility
function of consumption, for each consumption level. Thus it is an attribute of a model, not an empirical
measure usually.
It is defined by RA(c) = -cu''(c) / u'(c).
If RR(c) is constant for all c, and there are only two possible investments, a risky one and a risk-free one,
the proportion of investment in the one risky asset is constant for all c.
See also coefficient of absolute risk aversion, which is RR(c)/c.
Source: Huang and Litzenberger, p. 20

Contexts: finance; models; utility
coefficient of variation: An attribute of a distribution: its standard deviation divided by its mean.
Example: In a series of wage distributions over time, the standard deviation may rise over time with
inflation, but the coefficient of variation may not, and thus the fundamental inequality may not.
Source: Atkinson, 1970, p 252

cohort: A sub-population going through some specified stage in a process. The term is often applied to
describe a population of persons going through some life stage, like a first year in a new school.
cointegration: "An (n x 1) vector time series yt is said to be cointegrated if each of the series taken
individually is ... nonstationary with a unit root, while some linear combination of the series a'y is
stationary ... for some nonzero (n x 1) vector a."
Hamilton uses the phrasing that yt is cointegrated with a', and offers a couple of examples. One was that
although consumption and income time series have unit roots, consumption tends to be a roughly
constant proportion of income over the long term, so (ln income) minus (ln consumption) looks
stationary.
Source: Hamilton, p. 571

Contexts: econometrics; time series; data
commercial paper: commoditized short-term corporate debt.
Contexts: finance

common pool resource: A common pool resource is one which can be used by many users at once, and
use by each one reduces the benefits available to the others. Examples are the radio spectrum, ocean
fisheries, public roads and parks.
Common pool resources are different from public goods such as information, for which use by one user
does not reduce its availability to others. (Kruse, 2002, p. 664.)
Source: Kruse, Elizabeth F. "From free privilege to regulation: Wireless firms and the competition for
spectrum rights before World War I" Business History Review, Winter 2002, 76:4.
compact: A set is compact if it is closed and bounded.
The concept comes up most often in economics in the context of a theory in which a function must be
maximized. Continuous functions that are well defined on a compact domain have a maximum and
minimum; this is the Weierstrauss Theorem. Noncontinuous functions, or functions on a noncompact
domain, may not.
Contexts: real analysis; micro theory
comparative advantage: To illustrate the concept of comparative advantage requires at least two goods
and at least two places where each good could be produced with scarce resources in each place. The
example drawn here is from Ehrenberg and Smith (1997), page 136. Suppose the two goods are food
and clothing, and that "the price of food within the United States is 0.50 units of clothing and the price
of clothing is 2 units of food. [Suppose also that] the price of food in China is 1.67 units of clothing and
the price of clothing is 0.60 units of food." Then we can say that "the United States has a comparative
advantage in producing food and China has a comparative advantage in producing clothing. It follows
that in a trading relationship the U.S. should allocate at least some of its scarce resources to producing
food and China should allocate at least some of its scarce resources to producing clothing, because this
is the most efficient allocation of the scarce resources and allows the price of food and clothing to be as
low as possible.
Famous economist David Ricardo illustrated this in the 1800s using wool in Britain and wine from
Portugal as examples. The comparative advantage concept seems to be one of the really challenging,
novel, and useful abstractions in economics.
Source: Ehrenberg and Smith, Modern Labor Economics, sixth edition

Contexts: trade
compensating variation: The price a consumer would need to be paid, or the price the consumer would
need to pay, to be just as well off after (a) a change in prices of products the consumer might buy, and
(b) time to adapt to that change. It is assumed the consumer does not benefit or lose from producing the
product.
Source: Hicks, John R. 1942. "Consumers' Surplus and Index Numbers." Review of Economic Studies 9
(2). pp 126-137. as cited in: Brynjolfsson, Erik, Michael D. Smith, Yu (Jeffrey) Hu. "Consumer Surplus
in the Digital Economy: Estimating the Value of Increased Product Variety." p.6. On the net as of Jan 7,
2003.
Contexts: IO

competency trap: The position of an organization which uses a suboptimal procedure because it is good
enough in the short run and so does not switch to a better one. Becker (2004, p. 653) quotes Levitt and
March (1988, p. 322) thus: "favorable performance with an inferior procedure leads an organization to
accumulate more experience with it, thus keeping experience with a superior procedure inadequate to
make it rewarding to use".
Source: Becker, Markus C. "Organizational routines: a review of the literature." Industrial and
Corporate Change. Vol 13, no. 4 (August 2004), pp. 643-677.
Levitt, B., and J. March. 1988. "Organizational learning," Annual Review of Sociology, vol. 14, pp. 319-
340.
Contexts: management; sociology; organizations
complete: (economics theory definition) A model's markets are complete if agents can buy insurance
contracts to protect them against any future time and state of the world.
(statistics definition) In a context where a distribution is known except for a parameter , a minimal
sufficient statistic is complete if there is only one unbiased estimator of  using that statistic.
Contexts: modelling; statistics
complete market: One in which the complete set of possible gambles on future states-of-the-world can
be constructed with existing assets.
This is a theoretical ideal against which reality can be found more or less wanting. It is a common
assumption in finance or macro models, where the set of states-of-the-world is formally defined.
Another phrasing: "a complete set of state contingent claim markets." (HL, p. 124).
Source: Huang and Litzenberger, 1988, p. 124

Compustat: a data set used in finance
Contexts: finance; data
concavity of distribution function condition: A property of a distribution function-utility function

pair. (At least, it MAY require specification of the utility function; this editor can't tell well.) It is
assumed to hold in some principal-agent models so as to make certain conclusions possible.
concentration ratio: A way of measuring the concentration of market share held by particular suppliers
in a market. "It is the percentage of total market sales accounted for by a given number of leading
firms." Thus a four-firm concentration ratio is the total market share of the four firms with the largest
market shares. (Sometimes this particular statistic is called the CR4.)
Source: Greer, 1992, p. 176

Contexts: IO
condition number: A measure of how close a matrix is to being singular. Relevant in estimation if the
matrix of regressors is nearly singular the data are nearly collinear and (a) it will be hard to make an

accurate or precise inverse, (b) a linear regression will have large standard errors.
The condition number is computed from the characteristic roots or eigenvalues of the matrix. If the
largest characteristic root is denoted L and the smallest characteristic root is S (both being presumed to
be positive here, that is, the matrix being diagnosed is presumed to be positive definite), then the
condition number is:
 = (L/S).5
Values larger than 20, according to Greene (93), are observed if and only if the matrix is 'nearly
singular'. Greene cites Belsley et al (1980) for this term and the number 20.
Source: Greene, 1993, p 33; cites Belsley et al 1980.

conditional: has a special use in finance when used without other modifiers; often means 'conditional on
time and previous asset returns'. In that context, one might read 'returns are conditionally normally
distributed.'
Contexts: finance
conditional factor demands: a collection of functions that give the optimal demands for each of several
inputs as a function of the output expected, and the prices of inputs. Often the prices are taken as given,
and incorporated into the functions, and so they are only functions of the output.
Usual forms:
x1(w1, w2, y) is a conditional factor demand for input 1, given input prices w 1 and w2, and output
quantity y
Source: Varian, 1992

Contexts: models; micro
conditional variance: Shorthand often used in finance to mean, roughly, "variance at time t given that
many events up through time t-1 are known."
For example, it has been useful in studying aggregate stock prices, which go through periods of high
volatility and periods of low volatility, to model them econometrically as having the variance at time t as
coming from an AR process. This is the ARCH idea. In such a statistical model, the conditional variance
is generally different from the unconditional variance. That is, the unconditional variance is the variance
of the whole process, whereas the 'conditional variance' can be better estimated since in this phrasing it
is assumed that we can estimate the immediately previous values of variance.
Contexts: finance
conformable: A matrix may not have the right dimension or shape to fit into some particular operaton
with another matrix. Take matrix addition -- the matrices are supposed to have the same dimensions to
be summed. If they don't, we can say that they are not conformable for addition. The most common
application of the term comes in the context of multiplication. Multiplying an M x N matrix A by an R x
S matrix B directly can only be done if N=R. Otherwise the matrices are not conformable for this

purpose. If instead M=R, then the intended operation may be to take the transpose of A and multiply it
by B. This operation would properly be denoted A'B, where the prime denotes the transpose of A.
conglomerate: A firm operating in several industries.
Contexts: business; finance
consistent: An estimator for a parameter is consistent iff the estimator converges in probability to the
true value of the parameter; that is, the plim of the estimator, as the sample size goes to infinity, is the
parameter itself. Another phrasing: an estimator is consistent if it has asymptotic power of one.
"Consistency", without a modifier, is synonymous with weak consistency.
From Davidson and Mackinnon, p. 79: If for any possible value of the parameter  in a region of a
parameter space the power of a test goes to one as sample size n goes to infinity, that test is said to be
consistent against alternatives in that region of the parameter space. That is, if as the sample size
increases we can in the limit reject every false hypothesis about the parameter, the test is consistent.
How does one prove that an estimator is consistent? Here are two ways.
(1) Prove directly that if the model is correct, the estimator has power one in the limit to reject any
alternative but the true parameter.
(2) Sufficient conditions for proving that an estimator is consistent are (i) that the estimator is
asymptotically unbiased and (ii) that its variance collapses to zero as the sample size goes to infinity.
This method of proof is usually easier than (1) and is commonly used.
The existence of a consistent estimator for a parameter is proof that the parameter is identified. But a
parameter could be identified without there being a consistent estimator. For more on this see comment
on consistency and identification.
constant returns to scale: An attribute of a production function. A production function exhibits

constant returns to scale if changing all inputs by a positive proportional factor has the effect of
increasing outputs by that factor. This may be true only over some range, in which case one might say
that the production function has constant returns over that range.
Contexts: models
Consumer Expenditure Survey: Conducted by the U.S. government. See its Web site.
Contexts: data
consumption beta: "A security's consumption beta is the slope in the regression of its return on per
capita consumption."
Source: Fama 1991 p 1596

Contexts: finance
consumption set: The set of affordable consumption bundles. One way to define a consumption set is

by a set of prices, one for each possible good, and a budget. Or a consumption set could be defined in a
model by some other set of restrictions on the set of possible consumption bundles.
E.g. if consumer i can consume nonnegative quantities of all goods, it is standard to define x i as i's
consumption set, a member of R+L where L is the number of goods. Normally if the agent is endowed
with a set of goods, the endowment is in the consumption set.
contingent valuation: The use of questionnaires about valuation to estimate the willingness of
respondents to pay for public projects or programs.
Often the question is framed, "Would you accept a tax of x to pay for the program?" Any such survey
must be carefully done, and even so there is dispute about the value of the basic method, as is discussed
in the issue of the JEP with the Portney (1994) article.
Source: Portney, 1994

Contexts: public finance
contract curve: Same as Pareto set, with the implication that it is drawn in an Edgeworth box.
Source: Varian, 1992, p 324

Contexts: micro theory; general equilibrium; models
contraction mapping: Given a metric space S with distance measure d(), and T:S->S mapping S into
itself, T is a contraction mapping if for some b ('') in the range (0,1), d(Tx,Ty) is less than or equal to
b*d(x,y) for all x and y in S.
One often abbreviates the phrase 'contraction mapping' by saying simply that T is a contraction.
The function resulting from the applications of a contraction could slope the opposite way of the original
function as long as it is less steeply sloped.
A standard way to prove that an operator T is a contraction is to prove that it satisfies Blackwell's
conditions.

contractionary fiscal policy: A government policy of reducing spending and raising taxes.
In the language of some first courses in macroneconomics, it shifts the IS curve (investment/saving
curve) to the left.
Contexts: macro
contractionary monetary policy: A government policy of raising interest rates charged by the central
bank.
In the language of some first courses in macroeconomics, it shifts the LM curve (liquidity/money curve)
to the left.
Contexts: macro

control for: As used in the following way: "The effect of X on Y disappears when we control for Z",
the phrase means to regress Y on both X and Z, together, and to interpret the direct effect of X as the
only effect. Here the effect of Z on X has been "controlled for". It is implied that X is not causing
changes in Z.
Contexts: phrases; econometrics
control variable: A variable in a model controlled by an agent in order to optimize something.
Contexts: models
convergence: Multiple meanings: (1) a mathematical property of a sequence or series that approaches a
value;
In macro: "'Catch-up' refers to the long-run process by which productivity laggards close the
proportional gaps that separate them from the productivity leader .... 'Convergence,' in our usage, refers
to a reduction of a measure of dispersion in the relative productivity levels of the array of countries
under examination." Like Barro and Sala-i-Martin (92)'s "sigma-convergence", a narrowing of the
dispersion of country productivity levels over time.
Source: From Moses Abramovitz and Paul A. David, 1996. "Convergence and Deferred Catch-up:
productivity leadership and the waning of American exceptionalism." In Mosaic of Economic Growth,
edited by Ralph Landau, Timothy Taylor, and Gavin Wright.
convergence in quadratic mean: A kind of convergence of random variables. If xt converges in

quadratic mean it converges in probability but it does not necessarily converge almost surely.
The following is a best guess, not known to be correct.

Let et be a stochastic process and F t be an information set at time t uncorrelated with e t:
E[et|Ft-m] converges in quadratic mean to zero as m goes to infinity IFF:

E[E[et|Ft-m]2] converges to zero as m goes to infinity.
Contexts: probability; econometrics
convolution: The convolution of two functions U(x) and V(x) is the function:
U*V(x) = (integral from 0 to x of) U(t)V(x-t) dt
Source: Derrick, 1984

Contexts: calculus; complex analysis; real analysis; time series
Cook's distance: A metric for deciding whether a particular point alone affects regression estimates
much. After a regression is run one can consider for each data point how far it is from the means of the
independent variables and the dependent variable. If it is far from the means of the independent
variables it may be very influential and one can consider whether the regression results are similar
without it.
[Need to add the equation defining the Cook's d here.]

Source: Stephen Brown (stephenb@nwu.edu as of Aug 25, 1999)

With thanks to: Stephen Brown (stephenb@nwu.edu as of Aug 25, 1999)
cooperative game: A game structure in which the players have the option of planning as a group in
advance of choosing their actions. Contrast noncooperative game.
Contexts: game theory
core: Defined in terms of an original allocations of goods among agents with specified utility functions.
The core is the set of possible reallocations such that no subset of agents could break off from the others
and all do better just by trading among themselves.
Equivalently: The intersection of individually rational allocations with the Pareto efficient allocations.
Individually rational, here, means the allocations such that no agent is worse off than with his
endowment in the original allocation.
corner solution: A choice made by an agent that is at a constraint, and not at the tangency of two
classical curves on a graph, one characterizing what the agent could obtain and the other characterizing
the imaginable choices that would attain the highest reachable value of the agents' objective.
A classic example is the intersection between a consumer's budget line (characterizing the maximum
amounts of good X and good Y that the consumer can afford) and the highest feasible indifference
curve. If the agent's best available choice is at a constraint -- e.g. among affordable bundles of good X
and good Y the agent prefers quantity zero of good X -- that choice is often not at a tangency of the
indifference curve and the budget line, but at a "corner"
Contrast interior solution.
correlation: Two random variables are positively correlated if high values of one are likely to be
associated with high values of the other. They are negatively correlated if high values of one are likely
to be associated with low values of the other.
Formally, a correlation coefficient is defined between the two random variables (x and y, here). Let sx
and xy denote the standard devations of x and y. Let sxy denote the covariance of x and y. The
correlation coefficent between x and y, denoted sometimes rxy, is defined by:
rxy = sxy / sxsy
Correlation coefficients are between -1 and 1, inclusive, by definition. They are greater than zero for
positive correlation and less than zero for negative correlations.
Source: Greene, 1997, page 102-3


cost curve: A graph of total costs of production as a function of total quantity produced.
Contexts: IO; micro
cost function: is a function of input prices and output quantity. Its value is the cost of making that
output given those input prices. A common form: c(w1, w2, y) is the cost of making output quantity y
using inputs that cost w1 and w2 per unit.

Contexts: models
cost-benefit analysis: An approach to public decisionmaking. Quotes below from Sugden and
Williams, 1978 p. 236, with some reordering: "Cost-benefit analysis is a 'scientific' technique, or a way
of organizing thought, which is used to compare alternative social states or courses of action." "Cost-
benefit analysis shows how choices should be made so as to pursue some given objective as efficiently
as possible." "It has two essential characteristics, consistency and explicitness. Consistency is the
principle that decisions between alternatives should be consistent with objectives....Cost-benefit analysis
is explicit in that it seeks to show that particular decisions are the logical implications of particular,
stated, objectives." "The analyst's skill is his ability to use this technique. He is hired to use this skill on
behalf of his client, the decision-maker..... [The analyst] has the right to refuse offers of employment that
would require him to use his skills in ways that he believes to be wrong. But to accept the role of analyst
is to agree to work with the client's objectives." p. 241: Two functions of cost-benefit analysis: It "assists
the decision-maker to pursue objectives that are, by virtue of the community's assent to the decision-
making process, social objectives. And by making explicit what these objectives are, it makes the
decision-maker more accountable to the community." "This view of cost-benefit analysis, unlike the
narrower value-free interpretation of the decision-making approach, provides a justification for cost-
benefit analysis that is independent of the preferences of the analyst's immediate client. An important
consequence of this is that the role of the analyst is not completely subservient to that of the decision-
maker. Because the analyst has some responsibility of principles over and above those held by the
decision-maker, he may have to ask questions that the decision-maker would prefer not to answer, and
which expose to debate conflicts of judgement and of interest that might otherwise comfortably have
been concealed."
Source: Sugden and Williams, 1978

Contexts: public
cost-of-living index: A cost-of-living price index measures the changing cost of a constant standard of
living. The index is a scalar measure for each time period. Usually it is a positive number which rises
over time to indicate that there was inflation. Two incomes can be compared across time by seeing
whether the incomes changed as much as the index did.
Contexts: macro; prices
costate: A costate variable is, in practice, a Lagrangian multiplier, or Hamiltonian multiplier.
Contexts: models
countable additivity property: the third of the properties of a measure.

Contexts: math; probability; measure theory
coupon strip: A bond can be resold into two parts that can be thought of as components: (1) a principal
component that is the right to receive the principal at the end date, and (2) the right to receive the
coupon payments. The components are called strips. The right to receive coupon payments is the coupon
strip.
Cournot duopoly: A pair of firms who split a market, modeled as in the Cournot game.
Contexts: IO; models
Cournot game: A game between two firms. Both produce a certain good, say, widgets. No other firms
do. The price they receive is a decreasing function of the total quantity of widgets that the firms produce.
That function is known to both firms. Each chooses a quantity to produce without knowing how much
the other will produce.
Cournot model: A generalization of the Cournot game to describe industry structure. Each of N firms
will choose a quantity of output. Price is a commonly-known decreasing functions of total output. All
firms know N and take the output of the others as given. Each firm has a cost function c i(qi). Usually the
cost functions are treated as common knowledge. Often the cost functions are assumed to be the same
for all firms.
The prediction of the model is that the firms will choose Nash equilibrium output levels.
Formally, from notes given by Michael Whinston to the Economics D50-1 class at Northwestern U. on
Sept 23, 1997:
Denote xi as a quantity that firm i considers,
X as the total quantity (the sum of the xi's),
xi* and X* as the Nash equilibrium levels of those quantities,
X-i as the total quantity chosen by all firms other than firm i,
and p(X) as the function mapping total quantity to price in the market.
Each firm i solves:

maxx p(xi+X-i)-ci(xi)
i
The first order conditions are, for i from 1 to N:
p'(xi*+X-i)+p(X*)-ci'(xi*)=0
Assuming xi* is greater than 0 for all i, then the Nash equilibrium output levels are characterized by the
N equations:
p'(X*)xi* + p(X*) = ci'(xi*) for each i.

Source: handout of Michael Whinston, 9/23/97.

Contexts: IO
covariance stationary: A stochastic process is covariance stationary if neither its mean nor its
autocovariances depend on the time or spatial index. For an empirical purpose, one might formally make
the assumption that a time series was covariance stationary, then use the data to estimate the mean,
variance, and autocovariances.
Formally the definition can be written this way. A stochastic process {yt} is covariance stationary if
there exists a constant mean , a constant variance 2, and a series of constant autocovariances s such
that (using E as the mean or expectations operator):
(1) E[yt] =  for all integers t

(2) E[(yt-)2)] = 2 for all integers t and
(3) E[(yt-) (yt+j-)] = E[(ys-) (ys+j -)] for all integers s, t, and j.
Contrast strict stationarity which is usually stricter but includes process which do not have finite
variances. Covariance stationary means the same as weakly stationary and generally the same as just
stationary.
Source: Enders, 1995, p. 69

covered: Covered employment is that set of U.S. jobs which pay into the state unemployment insurance
systems and therefore the holders of the jobs will receive insurance payments if they are laid off.
Contexts: government
Cowles Commission: A 1950s, probably British, panel on econometrics which focussed attention on the
problem of simultaneous equations. In some tellings of the history this had an impact on the field --
other problems such as errors-in-variables (measurement errors in the independent variables), were set
aside or given lower priority elsewhere too because of the prestige and influence of the Cowles
Commission.
Source: The New Palgrave: Econometrics (e.g. p.82)

CPI: The Consumer Price Index, which is a measure of the cost of goods purchased by average U.S.
household. It is calculated by the U.S. government's Bureau of Labor Statistics.
As a pure measure of inflation, the CPI has some flaws:

1) new product bias (new products are not counted for a while after the appear)
2) discount store bias (consumers who care won't pay full price)
3) substitution bias (variations in price can cause consumers to respond by substituting on the spot, but
the basic measure holds their consumption of various goods constant)
4) quality bias (product improvements are under-counted)
5) formula bias (overweighting of sale items in sample rotation)

Source: Message from Louis Crandall of Wrightson Associates on sci.econ.research circa 10/24/96.
Contexts: macro; labor; data
CPI-U: The U.S.'s government's "Consumer Price Index for All Urban Consumers.
Contexts: data
CPI-W: The U.S.'s government's "Consumer Price Index for Urban Wage Earners and Clerical
Workers.
Contexts: data
CPS: The Current Population Survey (of the U.S.) is compiled by the U.S. Bureau of the Census, which
is in the Dept of Commerce. The CPS is the source of official government statistics on employment and
unemployment in the U.S. Each month 56,500-59,500 households are interviewed about their average
weekly earnings and average hours worked. The households are selected by area to represent the states
and the nation. "Each household is interviewed once a month for four consecutive months in one year
and again for the corresponding time period a year later" to make month-to-month and year-to-year
comparisons possible. The March CPS is special. For one thing the respondents are asked about
insurance then.
Source: Blanchflower and Oswald, Ch 4, p. 171; Freeman, 1991

Contexts: data
Cramer-Rao lower bound: Whenever the Fisher information I(b) is a well-defined matrix or number,
the variance of an unbiased estimator B for b is at least as large as [I(B)]-1.

creative destruction: The phenomenon of old industries being wiped out and new ones arising through
the process of changing opportunities (like new technology) under capitalism. The term is attributed by
Mancusi, 2004, p. 272 to Schumpeter, 1912.
Source: Mancusi, Maria Luisa. "Georgraphical concentration and the dynamics of countries'
specialization in technologies" Economics of Innovation and New Technology 2003, vol 12:3, pp. 269-
291.
Schumpeter, Joseph. 1912. The Theory of Economic Development.

Contexts: phrases
criterion function: Synonym for loss function. Used in reference to econometrics.
critical region: synonym for rejection region. This describes the subset of the sample space which
would cause rejection of the hypothesis being tested.
Source: Davidson and MacKinnon, 1993, p 78-79; Hogg and Craig, 5th edition, p. 282

Cronbach's alpha: A test for a model or survey's internal consistency. Called a 'scale reliability
coefficient' sometimes. The remainder of this definition is partial and unconfirmed.
Cronbach's alpha assesses the reliability of a rating summarizing a group of test or survey answers
which measure some underlying factor (e.g., some attribute of the test-taker). A score is computed from
each test item and the overall rating, called a 'scale' is defined by the sum of these scores over all the test
items. Then reliability  is defined to be the square of the correlation between the measured scale and
the underlying factor the scale was supposed to measure. (Which implies that one has another measure
in test cases of that underlying factor, or that it's imputed from the test results.) (In Stata's examples it
remains unclear what the scale is, and how it's measured; apparently alpha can be generated without
having a measure of the underlying factor.)
Source: StataCorp. 1999 Stata Statistical Software: Release 6.0. College Station, TX: Stata Corporation.
pages 20-24 of Reference Volume 1.
Contexts: surveys
cross-section data: Parallel data on many units, such as individuals, households, firms, or governments.
Contrast panel data or time series data.
cross-validation: A way of choosing the window width for a kernel estimation. The method is to select,
from a set of possible window widths, one that minimizes the sum of errors made in predicting each data
point by using kernel regression on the others.
Formally, let J be the number of data points, j an index to each one, from one to J, y j the dependent
variable for each j, Xj the independent variables for that j, Yj the dependent variable for that j, and {h i}
for i=1 to n the set of candidate window widths. The h i's might be a set of equally spaced values on a
grid. The algorithm for choosing one of the hi's is:
For each candidate window width hi

{
..For each j from 1 to J
..{
....Drop the data point (Xj, Yj) from the sample temporarily
....Run a kernel regression to estimate Y j using the remaining X's and Y's
....Keep track of the square of the error made in that prediction
..}
..Sum the squares of the errors for every j to get a score for candidate window width h i
..Record that in a list as the score for h i
}
Select as the outcome h of this algorithm the hi with the lowest score
The grid approach is necessary because the problem is not concave. Otherwise one might try a simpler
maximization e.g., with the first order conditions.
Note however that a complete execution of the cross-validation method can be very slow because it
requires as many kernel regressions as there are data points. E.g. in this author's experience, the cross-

validation computation for one window width on 500 data points on a Pentium-90 in Gauss took about
five seconds, 1000 data points took circa seventeen seconds, but for 15000 data points it took an hour.
(Then it takes another hour to check another window width; so even the very simplest choice, between
two window widths, takes two hours.)
Source: Hardle, 1990

Contexts: nonparametrics; estimation; econometrics; statistics
CRRA: Stands for Constant Relative Risk Aversion, a property of some utility functions, also said to
have isoelastic form. CRRA is a synonym for CES.
Example 1: for any real a<1, u(c)=ca/a is a CRRA utility function. It is a vNM utility function.
Source: Blanchard and Fischer, pp 43-44.

Contexts: models; finance
CRS: Stands for Constant Returns to Scale.
CRSP: Center for Research in Security Prices, a standard database of finance information at the
University of Chicago. Has daily returns on NYSE, AMEX, and NASDAQ stocks.
Started in early 1970s by Eugene Fama among others. The data there was so much more convenient than
alternatives that it drove the study of security prices for decades afterward. It did not have volume data
which meant that volume/volatility tests were rarely done.
Contexts: finance; data
cubic spline: A particular nonparametric estimator of a function. Given a data set {X i, Yi} it estimates
values of Y for X's other than those in the sample. The process is to construct a function that balances
the twin needs of (1) proximity to the actual sample points, (2) smoothness. So a 'roughness penalty' is
defined. See Hardle's equation 3.4.1 near p. 56 for exact equation. The cubic spline seems to be the most
common kind of spline smoother.

Contexts: econometrics; nonparametrics; estimation
current account balance: The difference between a country's savings and its investment. "[If] positive,
it measures the portion of a country's saving invested abroad; if negative, the portion of domestic
investment financed by foreigners' savings."
Defined by the sum of the value of imports of goods and services plus net returns on investments
abroad, minus the value of exports of goods and services, where all these elements are measured in the
domestic currency.
Source: Maurice Obstfeld, "The global capital market: benefactor or menace?", Journal of Economic
Perspectives, vol 12, no. 4, Fall 1998, page 11.
Contexts: trade; international; macro
DARA: decreasing absolute risk aversion

data:
Relevant terms: AFQT, Amos, BHPS, BLS, CEX, clustered data, cohort, cointegration, Compustat,
Consumer Expenditure Survey, CPI, CPI-U, CPI-W, CPS, CRSP, DataDesk, EconLit, ExecuComp,
FASB, filter, FIPS, Freddie Mac, Gauss, GDP deflator, GSOEP, High School and Beyond, HSB,
INSEE, IPUMS, Limdep, longitudinal data, M1, March CPS, Matlab, Minitab, MSA, natural
experiment, NELS, NIPA, NLREG, NLS, NLSY, NLSYW, NORC, OES, poverty, PSID, RATS, ridit
scoring, S-Plus, SAS, SHAZAM, SIC, SIPP, SLID, SMSA, Solas, SPSS, SSEP, SSRN, Stata, Statistica,
SUDAAN, top-coded, tutorial, unemployment, urban ghetto, WesVar, X-11 ARIMA.
Contexts: fields
DataDesk: Data analysis software, discussed at http://www.datadesk.com.
Contexts: data; software
decision rule: Either (1) a function that maps from the current state to the agent's decision or choice or
(2) a mapping from the expressed preferences of each of a group of agents to a group decision. The first
is more relevant to decision theory and dynamic optimization; the second is relevant to game theory.
The phrase allocation rule is sometimes used to mean the same thing as decision rule. The term
strategy-proof has been defined in both contexts.
Contexts: macro; models; game theory
decomposition theorem: Synonym for FWL theorem or Frisch-Waugh-Lovell theorem.
deductive: Characterizing a reasoning process of logical reasoning from stated propositions. Contrast
inductive.
Contexts: philosophy
deep: A capital market may be said to be deep if it has great depth (which see).
May less formally be used to describe a market with large total market capitalization.
Contexts: finance
delta: As used with respect to options: The rate of change of a financial derivative's price with respect to
changes in the price of the underlying asset. Formally this is a partial derivative.
A derivative is perfectly delta-hedged if it is in a portfolio with a delta of zero. Financial firms make
some effort to construct delta-hedged portfolios.
Source: Hull, 1997, p 312

Contexts: finance
delta method: Gives the distribution of a function of random variables for which one has a distribution.

In particular, for the function g(b,l), where b and l are estimators for true values b0 and l0:
g(b,l) ~ N(g(b0,l0), g'(b,l)var(b,l)g'(b,l)')
demand: A relation between each possible price and the quantity demanded at that price.
[Aspects of the population doing the demanding are often left implicit. An actual supply is not necessary
to conceive of demand because demand involves hypothetical quantities.]
Source: macro; micro theory
demand curve: For a given good, the demand curve is a relation between each possible price of the
good and the quantity that would be bought at market sale at that price.
Drawn in introductory classes with this arrangement of the axes, although price is thought of as the
independent variable:
Price | \
| \
| \
| \ Demand
|________________________
Quantity
Contexts: micro
demand deposits: The money stored in the form of checking accounts at banks.
Contexts: macro; money
demand set: In a model, the set of the most-preferred bundles of goods an agent can afford. This set is a
function of the preference relation for this agent, the prices of goods, and the agent's endowment.
Assuming the agent cannot have a negative quantity of any good, the demand set can be characterized
this way:
Define L as the number of goods the agent might receive an allocation of. An allocation to the agent is
an element of the space R+l; that is, the space of nonnegative real vectors of dimension L.
Define >p as a weak preference relation over goods; that is, x>px' states that the allocation vector x is
weakly preferred to x' .
Let e be a vector representing the quantities of the agent's endowment of each possible good, and p be a
vector of prices for those goods. Let D(> p,p,e) denote the demand set. Then:
D(>p,p,e) = {x: px <= pe and x >p x' for all affordable bundles x'}.
democracy: Literally "rule by the people". This is a dictionary definition and is not considered sharp
enough for academic use. Schumpeter (1942) contrasts these two definitions below and regards only the

second one as useful and plausible enough to work with: "The eighteenth-century philosophy of
democracy may be couched in the following definition: the democratic method is that institutional
arrangement for arriving at political decisions which realizes the common good by making the people
itself decide issues through the election of individuals who are to assemble in order to carry out its
will." (p 250) This "classical" definition has the problem that the will of the people is not clearly defined
here (e.g. consider voting paradoxes) or known (perhaps even to the people at the time), and this can
lead to ambiguity about whether a given political system is democratic. The following definition is
preferred for its clarity but has a modern feel that is at some distance from the original dictionary
definition. Political representation is assumed to be necessary here. "[T]he democratic method is that
institutional arrangement for arriving at political decisions in which individuals acquire the power to
decide by means of a competitive struggle for the people's vote." (p 269) More clearly: the democratic
method is one in which people campaign competitively for the people's votes to achieve the power to
make public decisions. This definition is the sharpest.
Source: Schumpeter, Joseph R. 1950. Capitalism, Socialism, and Democracy, third edition. (First edition
1942.) Harper & Row. New York.
Contexts: political economy
demography: The study of the size, growth, and age and geographical distribution of human
populations, and births, deaths, marriages, and migrations.
density function: A synonym for pdf.
depreciation: The decline in price of an asset over time attributable to deterioration, obsolescence, and
impending retirement. Applies particularly to physical assets like equipment and structures.
Source: Hulten, 2000, p. 8

Contexts: macro; accounting
depth: An attribute of a market.
In securities markets, depth is measured by "the size of an order flow innovation required to change
prices a given amount." (Kyle, 1985, p 1316).
Source: Kyle, 1985, p 1316

Contexts: finance
derivatives: securities whose value is derived from the some other time-varying quantity. Usually that
other quantity is the price of some other asset such as bonds, stocks, currencies, or commodities. It could
also be an index, or the temperature. Derivatives were created to support an insurance market against
fluctuations.
Contexts: finance
deterioration: The process or occurrence of an asset's declining productivity as it ages. This is a

component of depreciation.

determinant: An operator defined on square matrices or the value of that operator. For a matrix B the
determinant is denoted |B|. Its value is a unique scalar. Calculation of the value of the determinant is
discussed in linear algebra books.
Source: Chiang, 1984, p 93

deterministic: Not random. A deterministic function or variable often means one that is not random, in
the context of other variables available.
That is, those other variables determine the variable in question unerringly, by a function that would
give the same value every time those other variables were given to it as arguments, unlike a random one
which with some probability would give different answers.
Contexts: phrases
development: The study of industrialization.
Relevant terms: Kuznets curve.
Contexts: fields
Dickey-Fuller test: A Dickey-Fuller test is an econometric test for whether a certain kind of time series
data has an autoregressive unit root. In particular in the time series econometric model y[t] = y[t-1] + e
[t], where t is an integer greater than zero indexing time, and =1, let OLS denote the OLS estimate of 
from a particular sample. Let T be the sample size.
Then the test statistic T*(OLS -1) has a known, documented distribution. Its value in a particular
sample can be compared to that distribution to determine a probability that the original sample came
from a unit root autoregressive process; that is, one in which =1.
Source: Greene, 1997, Dickey and Fuller (1979) and (1981) (which are cited by Greene).
dictator game: A formal game with two players: Allocator A and Recipient R. They have received a
windfall of, say, $1. The allocator, moving first, proposes a split so that A would receive x and R would
receive 1-x. The recipient then accepts, no matter what A proposed. In a subgame perfect equilibrium, A
would offer R nothing. In experiments with human subjects, however, in which A and R do not know
one another, A offers relatively large shares to R (often 50-50). See also Ultimatum Game.
Contexts: game theory; models
diffuse prior: In Bayesian statistics the investigator has to specify a prior distribution for a parameter,
before the experiment or regression that is to update that distribution. A diffuse prior is a distribution of
the parameter with equal probability for each possible value, coming as close as possible to representing
the notion that the analyst hasn't a clue about the value of the parameter being estimated.
Source: Posts to the newsgroup sci.econ.research by moderator AK and ezivot@u.washington.edu,

responding to a question by Herbert M Gintis circa Feb 5, 1999.

discount factor: In a multi-period model, agents may have different utility functions for consumption
(or other experiences) in different time periods. Usually in such models they value future experiences,
but to a lesser degree than present ones. For simplicity the factor by which they discount next period's
utility may be a constant between zero and one, and if so it is called a discount factor. One might
interpret the discount factor not as a reduction in the appreciation of future events but as a subjective
probability that the agent will die before the next period, and so discounts the future experiences not
because they aren't valued, but because they may not occur.
A present-oriented agents discounts the future heavily and so has a LOW discount factor. Contrast
discount rate and future-oriented.
In a discrete time model where agents discount the future by a factor of b, one usually lets b=1/(1+r)
where r is the discount rate.
Contexts: models
discount rate: At least two meanings:
(1) The interest rate at which an agent discounts future events in preferences in a multi-period model.
Often denoted r. A present-oriented agent discounts the future heavily and so has a HIGH discount rate.
Contrast 'discount factor'. See also 'future-oriented'.
In a discrete time model where agents discount the future by a factor of b, one finds r=(1-b)/b, following
from b=1/(1+r).
(2) The Discount Rate is the name of the rate at which U.S. banks can borrow from the U.S. Federal
Reserve.
Contexts: finance; models; institutions
discrete choice linear model: An econometric model: Pr(yi=1) = F(Xi'b) = Xi'b
discrete choice model: An econometric model in which the actors are presumed to have made a choice
from a discrete set. Their decision is modeled as endogenous. Often the choice is denoted y i.
discrete regression models: Econometrics models in which the dependent variables assumes discrete
values.
Source: Maddala, p. 13
diseconomies of scale: Like economies of scale but with the implication that they are negative, so larger
scale would increase cost per unit.
disintermediation: prevention of banks from flowing money from savers to borrowers as an effect of
regulations; e..g the U.S. home mortgage market is partly blocked from banks and left to savings and

loan institutions.
Source: Branson
Contexts: macro
dismal science: Refers to the field of economics. The term continues to be used perhaps because
economics is so often about tradeoffs and is therefore said to be depressing to study.
This pejorative term was coined in the 1800s partly because of the assumption by economists such as
J.S. Mill that persons are similar and their differences in behavior can often be traced to institutions and
incentives. This was thought to be a dismal attitude by a person who believed that races of people had
very different inborn capabilities and attitudes. See
http://www.econlib.org/library/Columns/LevyPeartdismal.html for more of the history.
Contexts: phrases
distribution function: A synonym for cdf.
Divisia index: A continuous-time index number. "The Divisia index is a weighted sum of growth rates,
where the weights are the components' shares in total value." -- Hulten (1973, p. 1017)
See also http://www.geocities.com/jeab_cu/paper2/paper2.htm.
Source: Hulten, 1973; Hulten, 2000; Richter, 1966

Contexts: index numbers; macro
DOJ: Abbreviaton for the U.S. national Department of Justice, which does among other things
investigations into violations of antitrust law. See also FTC.
Contexts: IO; regulation; antitrust
dollarization: Widespread use, or routine official government use, of US dollars in a country in place of
that country's own currency.
Source: Officer, Lawrence H., "Reviewof Kurt Schuler Currency Boards and Dollarization" Economic
History Services, Nov 14, 2003, URL: http://www.eh.net/bookreviews/library/0705.shtml;
http://www.dollarization.org;
Domar aggregation: This seems to be the principle that the growth rate of an aggregate is the weighted
average of the growth rates of its components, where each component is weighted by the share of the
aggregate it makes up. The idea comes up in the context of national accounts and national statistics.
Contexts: macro; measurement; government
dominant design: After a technological innovcation and a subsequent era of ferment in an industry, a
basic architecture of product or process that becomes the accepted market standard. From Abernathy&
Utterback 1978, cited by A&T 1991. Dominant designs may not be better than alternatives nor
innovative. They have the benchmark features to which subsequent designs are compared. Examples
include the IBM 360 computer series and Ford's Model T automobile, and the IBM PC.

Source: Abernathy. 1978.;

Philip Anderson and Michael L. Tushman, Research-Technology Management, May/June 1991, pp 26-
31.
Contexts: IO; business history; technology; management
Donsker's theorem: Synonymous with Functional Central Limit Theorem (FCLT).
Source: Richardson and Stock (1989)

Contexts: time series
double coincidence of wants: phrasing from Jevons (1893). "[T]he first difficulty in barter is to find
two persons whose disposable possessions mutually suit each other's wants. There may be many people
wanting, and many possessing those things wanted; but to allow of an act of barter there must be a
double coincidence, which will rarely happen." That is, paraphrasing Ostroy and Starr, 1990, p 26, the
double coincidence is the situation where the supplier of good A wants good B and the supplier of good
B wants good A.
The point is that the institution of money gives us a more flexible approach to trade than barter, which
has the double coincidence of wants problem.
Source: Ostroy and Starr, 1990, p 26

dummy variable: In an econometric model, a variable that marks or encodes a particular attribute. A
dummy variable has the value zero or one for each observation, e.g. 1 for male and 0 for female. Same
as indicator variables or binary variables.
dumping: An informal name for the practice of selling a product in a foreign country for less than either
(a) the price in the domestic country, or (b) the cost of making the product. It is illegal in some countries
to dump certain products into them, because they want to protect their own industries from such
competition.
Contexts: trade
Durbin's h test: An algorithm for detecting autocorrelation in the errors of a time series regression. The
implicit citation is to Durbin (1970). The h statistic is asymptotically distributed normally if the
hypothesis that there is no autocorrelation.

Durbin-Watson statistic: A test for first-order serial correlation in the residuals of a time series
regression. A value of 2.0 for the statistic indicates that there is no serial correlation. For tables to
interpret the statistic see Greene pgs 738-743, and context discussing them is on pages 424-425.
This result is biased toward the finding that there is no serial correlation if lagged values of the
regressors are in the regression. Formally, the statistic is:
d=(sum from t=2 to t=T of: (et-et-1)2/(sum from t=1 to t=T of: et2)
where the series of et are the residuals from a regression.


Contexts: time series; estimation; econometrics
dyadic map: synonym for dyadic transformation.
Source: Domowitz and Muus, 1992, p 2849

Contexts: dynamical systems; chaos
dyadic transformation: For whole numbers t and initial value x0 in [0,1], consider the mapping:
xt+1 = (2xt) mod 1
"This law of motion is a standard example of chaotic dynamics. It is commonly known as the dyadic
transformation. It is mixing (and hence also ergodic)."
-- Domowitz and Muus, 1992, p 2849
All the xt's will be in [0,1]. Their distribution will depend on the initial value x0. If x0 is rational, the
mapping will eventually become periodic (for large enough values of t). If x 0 is irrational, the mapping
is never periodic.
Source: Domowitz and Muus, 1992, p 2849

Contexts: dynamical systems; chaos
dynamic: means "changing over time".
dynamic inconsistency: A possible attribute of a player's strategy in a dynamic decision-making

environment (such as a game).
When the best plan that a player can make for some future period will not be optimal when that future
period arrives, the plan is dynamically inconsistent.
In one stylized example, addicted smokers face this problem -- each day, their best plan is to smoke
today, and to quit (and suffer) tomorrow in order to get health benefits subesquently. But the next day,
that is once again the best plan, so they do not quit then either. (In a model this can come about if the
planner values the present much more than the near future, -- that is, has a low short-run discount factor
-- but has a higher discount factor between two future periods.)
Monetary policy is sometimes said to suffer from a dynamic inconsistency problem. Government
policymakers are best off to promise that there will be no inflation tomorrow. But once agents and firms
in the economy have fixed nominal contracts, the government would get seigniorage revenues from
raising the level of inflation.
Source: Cukierman, 1992; Kydland and Prescott, 1977

Contexts: macro; money; game theory; dynamic optimization
dynamic multipliers: The impulse responses in a distributed lag model.
Source: M.W. Watson, Ch 47, Handbook of Econometrics, p, 2899.

Contexts: econometrics; macro
dynamic optimization:

Relevant terms: Bellman equation, chaotic, dynamic inconsistency, dynamic optimizations, dynamic
programming, dynamical systems, hyperbolic discounting, quasi-hyperbolic discounting, time
inconsistency.
Contexts: fields
dynamic optimizations: maximization problems to which the solution is a function; equivalently,

optimization problems in infinite-dimensional spaces.

Contexts: macro; models; dynamic optimization
dynamic programming: The study of dynamic optimization problems through the analysis of
functional equations like value equations.
This phrase is normally used, analogously to linear programming to describe the study of discrete
problems; e.g. those for which a decision must be made at times t for t=1,2,3,...
Source: Stokey and Lucas, 1989, p 14

Contexts: macro; models; dynamic optimization
dynamical systems: The branch of mathematics describing processes in motion. Some are predictable
and others are not. Two reasons a process might be unpredictable are that it might be random, and it
might be chaotic.
Source: Devaney, 1992, p 1-2

Contexts: mathematics; dynamic optimization
EBIT: Stands for "earnings before interest and taxes" which is used as a measure of earnings
performance of firms that is not clouded by changes in debt or equity types, or tax rules.
Contexts: accounting; finance
EBITDA: An accounting measure of a private company's overall financial performance in a period of

time. Used in the U.S. but may not be used elsewhere [ed.: I don't know]. Stands for Earnings (or loss)
before Interest, Taxes, Depreciation, and Amortization. The figure is in currency units.
Source: balance sheets

Contexts: accounting; business
EconLit: An electronic bibliography of economics literature organized by the American Economics

Association, derived partly from the Journal of Economic Literature. EconLit is made available through
libraries and universities. See http://www.econlit.org for more information.
Source: http://www.econlib.org
Contexts: data; journals
econometric model: An economic model formulated so that its parameters can be estimated if one
makes the assumption that the model is correct.

Econometrica: A journal whose web site is at http://www.econometricsociety.org/es/journal.html .
Contexts: journals
econometrics:
Relevant terms: 2SLS, 3SLS, acceptance region, adapted, AIC, Akaike's Information Criterion, almost
surely, alternative hypothesis, AR, ARIMA, ARMA, asymptotic, asymptotic variance, asymptotically
equivalent, asymptotically unbiased, augmented Dickey-Fuller test, autocorrelation, autocovariance,
autocovariance matrix, autoregressive process, avar, bandwidth, Bayesian analysis, bias, bootstrapping,
Box-Cox transformation, Box-Jenkins, Breusch-Pagan statistic, Burr distribution, BVAR, calibration,
Cauchy distribution, cdf, censored dependent variable, characteristic function, Cholesky decomposition,
Cholesky factorization, Chow test, CLAD, Cochrane-Orcutt estimation, coefficient of determination,
cointegration, condition number, conformable, consistent, control for, convergence in quadratic mean,
correlation, covariance stationary, Cowles Commission, Cramer-Rao lower bound, criterion function,
critical region, cross-section data, cross-validation, cubic spline, decomposition theorem, delta method,
density function, Dickey-Fuller test, discrete choice linear model, discrete choice model, discrete
regression models, distribution function, dummy variable, Durbin's h test, Durbin-Watson statistic,
dynamic multipliers, econometric model, efficiency, eigenvalue decomposition, Epanechnikov kernel,
ergodic, error-correction model, essentially stationary, estimator, exclusion restrictions, expectation,
expected value, exponential family, F distribution, F test, FGLS, FIML, Fisher consistency, Fisher
information, Fisher transformation, fixed effects estimation, FWL theorem, Gaussian, Gaussian kernel,
Gaussian white noise process, generalized linear model, GEV, Gibbs sampler, GLS, GMM, Granger
causality, Grenander conditions, Hansen's J test, Hausman test, hedonic, heterogeneous process,
heteroscedastic, heteroskedastic, homoscedastic, homoskedastic, Huber standard errors, Huber-White
standard errors, idempotent, identification, IIA, iid, ILS, impulse response function, inadmissible,
incidental parameters, independent, indicator variable, information matrix, information number,
instrumental variables, instruments, integrated, inverse Mills ratio, invertibility, is consistent for, IV, J
statistic, jackknife estimator, k-nearest-neighbor estimator, Kalman filter, Kalman gain, kernel
estimation, kernel function, kitchen sink regression, KLIC, knots, Kolmogorov's Second Law of Large
Numbers, Kronecker product, Kruskal's theorem, kurtosis, LAD, LAN, large sample, likelihood
function, limited dependent variable, LIML, Lindeberg-Levy Central Limit Theorem, linear model,
linear probability models, linear regression, link function, locally identified, log-concave, log-convex,
logistic distribution, logit model, lognormal distribution, loss function, m-estimators, MA, MA(1), main
effect, maintained hypothesis, MAR, marginal significance level, martingale, martingale difference
sequence, maximum score estimator, mean square error, mean squared error, method of moments, MGF,
mixing, MLE, moment-generating function, Monte Carlo simulations, Moore-Penrose inverse, MSE,
multinomial, multinomial logit, multinomial probit, multivariate, Nadaraya-Watson estimator, NLLS,
noncentral chi-squared distribution, nonergodic, nonparametric estimation, normal distribution, null
hypothesis, ocular regression, OLS, omitted variable bias, Op(1), order condition, order of a kernel,
order of a sequence, Ox, p value, panel data, parametric, Pareto chart, Pareto distribution, partially linear
model, partition, pdf, Phillips-Perron test, polychotomous choice, power, Prais-Winsten transformation,
precision, predetermined variables, probability function, probit model, pseudoinverse, Q-statistic, QLR,
QML, quartic kernel, quasi-differencing, quasi-maximum likelihood, R-squared, random, random
effects estimation, random process, random walk, Rao-Cramer inequality, reduced form, regression
function, rejection region, restricted estimate, restriction, Riemann-Stieltjes integral, robust smoother,
roughness penalty, Sargan test, scatter diagram, scedastic function, Schwarz Criterion, score, second
moment, semi-nonparametric, semilog, sieve estimators, significance, significance level, simultaneous
equation system, size, SLLN, SMA, smoothers, smoothing, SNP, sparse, spatial autocorrelation, spectral
decomposition, spectrum, spline function, spline regression, spline smoothing, statistic, stochastic, strict
stationarity, strictly stationary, strong law of large numbers, strongly consistent, strongly dependent,

strongly ergodic, structural break, structural change, structural moving average model, structural
parameters, structure, SUR, SURE, survival function, SVAR, symmetric, t distribution, t statistic, test
for structural change, test of identifying restrictions, test statistic, time-varying covariates, tobit model,
trace, translog, transpose, treatment effects, triangular kernel, truncated dependent variable, Tukey
boxplot, two stage least squares, type I error, type I extreme value distribution, type II error, unbalanced
data, unbiased, uncorrelated, under the null, uniform kernel, uniform weak law of large numbers, unit
root, unit root test, univariate, univariate binary model, unrestricted estimate, UVAR, UWLLN, VAR,
variance, variance decomposition, vec, Wallis statistic, wavelet, weak law of large numbers, weak
stationarity, weakly consistent, weakly dependent, weakly ergodic, weighted least squares, white noise
process, White standard errors, within estimator, WLLN, Wold decomposition, Wold's theorem.
Contexts: fields
economic discrimination: in labor markets: the presence of different pay for workers of the same
ability but who are in different groups, e.g. black, white; male, female.
Source: Aigner and Cain, editor's comments, p 175
economic environment: In a model, a specification of preferences, technology, and the stochastic

processes underlying the forcing variables.
Source: Hansen and Singleton, 1982

Contexts: models
economic growth: Paraphrasing directly from Mokyr, 1990: Economic growth has four basic causes:
1) Investment, meaning increases in the capital stock (Solovian growth)
2) Increases in trade (Smithian growth)
3) Size or scale effects, e.g. by overcoming fixed costs, or achieving specialization
4) Increases in knowledge, most of which is called technological progress (Schumpeterian growth).
Further elaboration is in Mokyr's book.
Source: Mokyr, 1990, p. 4-6.

Contexts: history; macro
economic sociology: Piore (1996) writes of two definitions of economics, a narrow one organized
around optimization and a broad one organized around scarcity, and suggests that the subjects included
by the larger one but not in the smaller one are the subjects of economic sociology discussed in the
Handbook (1994).
More specifically, the broad definition of economics is "the study of how people employ scarce
resources and distribute them over time and among competing demands" paraphrasing Paul Samuelson
(1961). The narrower definition is from Gary Becker (1976): "The combined assumptions of
maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly . .
. [B]ehavior [of] participants who maximize their utility from a stable set of preferences and accumulate
an optimal amount of information and other inputs in a variety of markets."
A bit more specifically -- optimization and formal equilibrium are not natural subjects or methods of
economic sociology, but the general subjects of economics are. Economic sociology is more likely than
economics to use groups or organizations rather than individuals as units of analysis. The practical
definition seems to be evolving over time.

Source: Piore, Michael J. "Review of The Handbook of Economic Sociology," Journal of Economic
Literature XXXIV (June 1996), pp. 741-754, esp. p 741-2.
Samuelson, Paul A. 1961. Economics, an introductory analysis. 5th edition. New York: McGraw-Hill.
p. 5.
Becker, Gary. 1976. The economic approach to human behavior. Chicago: U. of Chicago Press.
Contexts: sociology; fields
economies of scale: Usually one says there are economies of scale in production of cost per unit made
declines with the number of units produced. It is a descriptive, quantitative term. One measure of the
economies of scale is the cost per unit made. There can be analosous economies of scale in marketing or
distribution of a product or service too. The term may apply only to certain ranges of output quantity.
Contexts: production theory
ECU: European Currency Unit
Editor's comment on time series: A frequent and dangerous mistake for those not familiar with this
language is to think that discussion of 'time series' are about data values in a sample. Actually, they are
about probability distributions. It has taken this author years to get used to that, which may just be
normal.
An example of the error is to think that a discussion about E[X t] is testable or measurable. Usually it's
not. It's assumed in the discussion. A sample has a computable mean, but whether a time series has a
trend, or a unit root, or heteroskedasticity are statements about a conjectured process, not statements
about data.
With thanks to: P B Meyer, pbmeyer@nwu.edu
education production function: Usually a function mapping quantities of measured inputs to a school
and student characteristics to some measure of school output, like the test scores of students from the
school.
For empirical purposes one might assume this function is linear and generate the linear regression:
Y = X'b + S'c + e
where Y is a measure of school outputs like a vector of student test scores, X is a set of measures of
student attributes (collectively or individually), S is vector of measures of schools those students attend,
b and c are coefficients, and e is a disturbance term.
Source: I am advised that one should look for a survey in the JEL around 1985 by Eric Hanushek.
Contexts: education; labor
EEH: An abbreviation for the journal Explorations in Economic History.
Contexts: journals
EER: An abbreviation for European Economic Review.

Contexts: journals
effective labor: In the context of a Solow model, if labor time is denoted L and labor's effectiveness, or
knowledge, is A, then by effective labor we mean AL. In general means 'efficiency units' of labor or
'productive effort' as opposed to time spent.

Contexts: macro
efficiency: Has several meanings. Sometimes used in a theoretical context as a synonym for Pareto
efficiency. Below is the econometric/statistical definition. Efficiency is a criterion by which to compare
unbiased estimators. For scalar parameters, one estimator is said to be more efficient than another if the
first has smaller variance. For multivariate estimators, one estimator is said to be more efficient than
another if the covariance matrix of the second minus the covariance matrix of the first is a positive
semidefinite matrix. Sometimes properties of the most efficient estimator can be computed; see
efficiency bound.
Computation of efficiency is defined on the basis of assumed distributions of errors ('disturbance terms').
It is not calculated directly on the basis of sample information unless the sample information come from
a simulation where the actual error distribution was known.
Source: Davidson and MacKinnon, 1993, p 95; Greene, 1993, p 93

efficiency bound: The minimum possible variance for an estimator given the statistical model in which
it applies. An estimator which achieves this variance is called efficient.
Source: Tripathi, 1996, p 4

Contexts: econometrics, statistics
efficiency units: Usually interpretable as "output per worker per hour."

More generally: An abstract measure of the amount produced for a constant production technology by a
worker in some time period. Often the context is theoretical and the time period and production
technology do not have to be specified.
But efficiency units can be conceived of (and theorized about) as a function of each worker's
characteristics, of the vintage of equipment, of the date in history, of the production technology, and so
forth.
efficiency wage hypothesis: The hypothesis that workers' productivity depends positively on their
wages. (For reasons this might be the case see the entry on efficiency wages.)
This could explain why employers in some industries pay workers more than employers in other
industries do, even if the workers have apparently comparable qualifications and jobs. A contrasting
explanation is that of hedonic models in which these differentials are explained by quality differences in
the jobs.
Source: Lawrence F. Katz, "Efficiency Wage Theories: A Partial Evaluation", NBER Macroeconomic
Annual 1986, p 235.

efficiency wages: A higher than market-clearing wage set by employers to, for example:
-- discourage shirking by raising the cost of being fired
-- encourage worker loyalty
-- raise group output norms
-- improve the applicant pool
-- raise morale
Labor productivity in efficiency wage models is positively related to wage.
By contrast, consider models in which the wage is equal to labor productivity in equilibrium, or models
in which wages are set to reduce the likelihood of unionization (union threat models). In these,
productivity is not a function of the wage.
efficient: A description of either:

-- an allocation that is Pareto efficient
or
-- an estimator that has the minimum possible variance given the statistical model; see efficiency bound.

efficient markets hypothesis: "A market in which prices always 'fully reflect' available information is
called 'efficient.'" -- Fama, p. 383
Source: "Efficient Capital Markets: a review of theory and empirical work" Journal of Finance, 1970, p.
384-417
Contexts: finance
EGARCH: Exponential GARCH. The EGARCH(p,q) model is attributed to Nelson, (1991).
Source: Nelson, 1991

Contexts: finance; statistics
eigenvalue: An eigenvalue or characteristic root of a square matrix A is a scalar L that satisfies the
equation:
det [ A - LI ] = 0
where "det" is the operator that takes a determinant of its argument, and I is the identity matrix with the
same dimensions as A.
eigenvalue decomposition: Same as spectral decomposition.

eigenvector: For each eigenvalue L of a square matrix A there is an associated right eigenvector,

denoted b that has the dimension of the number of rows of A. The right eigenvector satisfies: Ab = Lb
EJ: An occasional abbreviation for the British academic journal Economic Journal.
Contexts: journals
elasticity: A measure of responsiveness. The responsiveness of behavior measured by variable Z to a

change in environment variable Y is the change in Z observed in response to a change in Y. Specifically,
this approximation is common:
elasticity = (percentage change in Z) / (percentage change in Y)
The smaller the percentage change in Y is practical, the better the measure is and the closer it is to the
intended theoretically perfect measure.
Elasticities are often negative, but are sometimes reported in absolute value (perhaps for brevity) in
which case the author is depending on the reader knowing, or quickly applying, some theory. Usually
the theory is the theory of supply and demand.
Among the elasticities that show up in the economics literature are:

elasticity of quantity demanded of some product in response to a change in price of that product-- I think
this is "elasticity of demand" or "price elasticity of demand". These are ordinarily negative, and when
author reports a positive figure it is usually just an absolute value. A reader has to decide whether the
true value is negative; hopefully this is obvious.
elasticity of supply, which is analogous
elasticity of quantity demanded in response to a change in the potential consumer's income -- called
"income elasticity of demand". These are normally positive.
Inventing another kind of elasticity is plausible. Doing so implies a partial theory of behavior -- e.g. that
Y creates a reason for the agent to change behavior Z.
An elasticity can sometimes be measured in a regression. Dunn (2004) discusses a regression of the log
of a son's lifetime earnings on the log of his father's lifetime income in a regression:
y[son i] = beta*y[father i] + epsilon
Here the beta can be called an estimate of the elasticity of the sons' earnings to the fathers' earnings, in
the population. Dunn writes, "Viewed across individuals [beta] is the fraction of the earnings difference
between fathers that is typically observed between their sons." One might or might not want to view this
relationship as causal.
Source: Dunn, Christopher. Jan 2004. "Intergenerational Transmission of Lifetime Earnings: New
Evidence from Brazil". Working paper from University of Michigan Departiment of Economics and
Population Studies Center.
Contexts: micro; macro; measurement
elasticity of substitution: As measured in Broda and Weinstein (2005):
An elasticity of substitution is a scalar equal to or greater than one which measures the effect on

consumption of each of two goods if the price of the other changes. (See elasticity for a definition of its
measurement.)
If an elasticity is much larger than one, it suggests the two goods are nearly interchangeable; they are
close substitutes. If it is near one, they are not close substitutes, perhaps because they are substantively
different, or differ greatly in quality, or (empirically) because goods have been not been actually
classified as the econometrician has assumed. Sometimes an elasticity of substitution is assumed in a
demand function without being measured, but for purposes of building a theory.
Source: Broda and Weinstein. 2005. Globalization and the gains from variety. Aug 2005 working paper.
especially circa p.14
Contexts: demand; estimation
EMA: An occasional abbreviation for the journal Econometrica.
Contexts: journals
embedding effect: The tendency of some contingent valuation survey responses to be similar across
different survey questions in conflict with theories about what is valued in the utility function.
An example from Diamond and Hausman (1994): A survey might come up with a willingness-to-pay
amount that was the same for either (a) one lake or (b) five lakes which include the one that was asked
about individually. If lakes have some utility value to the respondent, one would have expected that five
lakes would be worth more than one. Possibly the difference arises because the respondent was not
expressing a specific preference for the first lake, and/or was not taking a budget constraint into account.
Diamond and Hausman argue that for this reason among others contingent valuation surveys cannot
arrive at good estimates for values of public goods.
Source: Kahneman and Knetsch, 1992; Diamond and Hausman, 1994

embodied: An attribute of the way technological progress affects productivity. In Solow (1956), any
improvement in technology instantaneously affects the productivity of all factors of production. In
Solow (1960) however productivity improvements were a property of only of new capital investment. In
the second case we say the technologies are embodied in the new equipment, but in the first case they
are disembodied.
Source: Mortensen, Job Reallocation paper, Feb 1997

Contexts: macro
employment-at-will: Describes an employment contract which gives the employer the authority to end
the employment relationship at any time without specific justification.
EMS: European Monetary System -- founded in 1979, its purpose was to reduce currency fluctuations,
and evolved toward offering a common currency.
Contexts: organizations; money
EMU: European Monetary Union.

endogenous: A variable is endogenous in a model if it is at least partly function of other parameters and
variables in a model. Contrast exogenous.
Contexts: phrases
endogenous growth model: An endogenous growth macro model is one in which the long-run growth
rate of output per worker is determined by variables within the model, not an exogenous rate of
technological progress as in a neoclassical growth model like those following from Ramsey (1928),
Solow (1956), Swan (1956), Cass (1965), Koopmans (1965). Influential early endogenous growth
models are Romer (1986), Lucas (1988), and Rebelo (1991). See the sources for this entry for more
information. Hulten (2000) says "What is new in endogenous growth theory is the assumption that the
marginal product of (generalized) capital is constant, rather than diminishing as in classical theories."
Generalized capital includes the result of investments in research and development (R&D).
Source: Barro and Sala-i-Martin, 1995, pp. 10-12; Romer, 1996, p 100; Hulten, 2000, p 37
Contexts: macro; growth
endowment: In a general equilibrium model, an individual's endowment is a vector made up of

quantities of every possible good that the individual starts out with.
energy intensity: energy consumption relative to total output (GDP or GNP).
Source: Rosenberg, Nathan. 1994. Exploring the Black Box. p 167-8.
Engel curve: On a graph with good 1 on the horizontal axis and good 2 on the vertical axis, envision a
convex indifference curve, and a diagonal budget constraint that meets it at one point. Now move the
budget constraint in and out and mark the points where the tangencies with indifference curves are. The
locus of such points is the Engel curve -- it's the mapping from wealth into the space of the two goods.
That is, the Engel curve is (x(w), y(w)) where w is wealth and x() and y() are the amounts of each of the
goods purchased at those levels of wealth.
Hardle (1990) p 18 defines the Engel curve as the graph of average expenditure (e.g. on food) as a
function of income. And on p 118, defines food expenditure as a function of total expenditure.
The name refers to 19th century Prussian statistician Ernst Engel, according to Fogel (1979).
Source: Hardle, 1990, p 18, 118

R.w. Fogel, "Notes on the social saving controversy," Journal of Economic History vol XXXIX, No. 1
(March 1979) page 2.
Contexts: models
Engel effects: Changes in commodity demands by people because their incomes are rising. A
generalization of Engel's law.
Source: Williamson and Lindert, 1980, p 179

Contexts: labor; macro; micro
Engel's law: The observation that "the proportion of a family's budget devoted to food declines as the

family's income increases."
See also Engel effects.
Source: Timmer, Falcon, and Pearson, 1983/1985, p 56

Contexts: micro; stylized facts
entrenchment: A possible description of the actions of managers of firms. Managers can make
investments that are more valuable under themselves than under alternative managers. Those
investments might not maximize shareholder value. So shareholders have a moral hazard in contracting
with managers.
Or, in the phrasing of Weisbach (1988): "Managerial entrenchment occurs when managers gain so much
power that they are able to use the firm to further their own interests rather than the interests of
shareholders."
The abstract to Shleifer and Vishny, 1989, p 123, is nicely explicit: "By making manager-specific
investments, managers can reduce the probability of being replaced, extract higher wages and larger
perquisities from shareholders, and obtain more latitude in determining corporate strategy."
Source: Shleifer and Vishny, 1989, p 123; Weisbach, 1988; Demsetz, 1983
Contexts: corporate finance; theory of the firm
EOE: European Options Exchange
Epanechnikov kernel: The Epanechnikov kernel is this function: (3/4)(1-u2) for -1<u<1 and zero for u
outside that range. Here u=(x-xi)/h, where h is the window width and xi are the values of the
independent variable in the data, and x is the value of the scalar independent variable for which one
seeks an estimate.
For kernel estimation.

epistemic: "Of, relating to; or involving knowledge or the act of knowing." An economic theory might
take aspects of human understanding or belief as fundamental to economic processes or outcomes.
Source: American Heritage Dictionary, 1982, p 460

Contexts: micro theory; philosophy
epistemology: "1. The division of philosophy that investigates the nature and origin of knowledge. 2. A
theory of the nature of knowledge."

epsilon-equilibrium: (Usually written with a true epsilon character.)

In a noncooperative game, for any small positive number epsilon, an epsilon-equilibrium is a profile of
totally mixed strategies such that each player gives more probability weight than epsilon only to
strategies that are best responses to the profile of strategies the others are playing.
For a more formal definition see sources. This is a rough paraphrase.
Source: Pearce, 1984, p 1037

epsilon-proper equilibrium: In a noncooperative game, a profile of strategies is an epsilon-proper

equilibrium if "every player is giving his better responses much more probability weight than his worse
responses (by a factor 1/epsilon), whether or not those 'better' responses are 'best'."
-- Myerson (1978), p 78.
Source: Myerson, 1978, p 78, as cited by Pearce, 1984, p 1037

equilibrium: Some balance that can occur in a model, which can represent a prediction if the model has
a real-world analogue. The standard case is the price-quantity balance found in a supply and demand
model. If the term is not otherwise qualified it often refers to the supply and demand balance. But there
also exist Nash equilibria in games, search equilibria in search models, and so forth.
Contexts: models
equity premium puzzle: Real returns to investors from the purchases of U.S. government bonds have
been estimated at one percent per year, while real returns from stock ("equity") in U.S. companies have
been estimated at seven percent per year (Kocherlakota, 1996). General utility-based theories of asset
prices have difficulty explaining (or fitting, empirically) why the first rate is so low and the second rate
so high, not only in the U.S. but in other countries too. The phrase equity premium puzzle comes from
the framing of this problem (why is the difference so great?) and the attention focused on it by Mehra
and Prescott (1985); sometimes the phrase risk free rate puzzle is used to describe the closely related
question: why is the bonds rate so low? The problem can be inverted to ask: why do investors not reject
the low-returning bonds in order to buy stocks, which would then raise the price of stocks and lower
their subsequent returns?
The above is drawn from the excellent review by Kocherlakota (1996) which surveys the substantial
literature on this subject. Abbreviating further from it: the theories against which the evidence constitute
a "puzzle" (or paradox, which see) tend to have these aspects in common: (1) standard preferences
described by standard utility functions, (2) contractually complete asset markets (against possible time-
and state-of-the-world contingencies), and (3) costless asset trading (in terms of taxes, trading fees, and
presumably information).
Overwhelmingly the discussion in the economics literature has focused on expansions to the formal
theory and on refinements and expansions of data sources, rather than survey evidence. A survey of U.S.
households would answer (has answered?) the question of why they invest so little in stocks.

[Editorial comment follows.] It is likely (but this is conjecture) that large fractions of the population do
not seriously consider investing in stocks, and are thus not rejecting stocks because their returns are low,
but rather because they do not know how and think there are some barriers to learning how; and/or they
perceive the risks of stocks to be higher than they have historically been; and/or they believe their
savings are insufficient to invest. These explanations suggest that as stock trading becomes easier (e.g.
over the Web, with heavy marketing and easy interfaces) the theories will fit better because more of the
population will buy stocks. Indeed, this has been observed over the last few years. Another class of
likely explanations is that people are highly impatient to spend their income (which would conflict with
standard constant-discount-rate utility functions, but agree with the evidence; see hyperbolic
discounting). Seen this way, the puzzle is not why the evidence looks the way it does, but the hard
theoretical problem of getting these factors into the asset pricing models.
Source: Kocherlakota, Narayana R. "The equity premium: it's still a puzzle," Journal of Economic
Literature vol XXXIV (March 1996), pp 42-71.
Mehra, Rajnish and Edward C. Prescott. "The equity premium: a puzzle," Journal of Monetary
Economics 15(2) (March 1985), pp 145-161.
Contexts: finance; macro; phrases
ergodic: Informally: a stochastic process is ergodic if no sample helps meaningfully to predict values
that are very far away in time from that sample. Another way to say that is that the time path of the
stochastic process is not sensitive to initial conditions.
Two events A and B (e.g. possible sets of states of the process) are ergodic iff, taking the limit as h goes
to infinity:
lim (1/h)SUMfrom i=1to i=h |Pr(A intersection with L-iB)-Pr(A)Pr(B)| = 0
Here L is the lag operator. This definition is like that of 'mixing on average'. A stochastic process is
ergodic, I believe, if all possible events in it are ergodic by this definition.
If a random process is mixing, it is ergodic.
Priestly, p 340: A process is ergodic iff 'time averages' over a single realization of the process converge
in mean square to the corresponding 'ensemble averages' over many realizations.
Example 1: Let xt (for integer t=0 to infinity) is known to be drawn iid from a standard normal
distribution. Then knowing the value of x1 doesn't help predict the value of x2, because they are
independently drawn. This time series process is ergodic.
Example 2: Suppose the process is x t=k+sin(t)+et where k is unknown and et is a white noise error. Then
any sample of xt for a known t gives information about k and that is enough information to make
predictions at remote times in the future that are just as good as predictions at nearby times. This process
is not ergodic.
ergodic properties: means persistent properties
ergodic set: In the context of a stochastic processes {x t}, set E is an ergodic set if:
(i) it is a subset of the state space S of possible values of x t,

(ii) if xt is in E, then Pr(xt+1 is in E}=1, and

(iii) no proper subset of E has the property in (ii).

Contexts: macro; stochastic processes
ERISA: The Employee Retirement Income Security Act of 1974, a major U.S. law which guaranteed
certain categories of employees a pension after some period at their employer; there had been more
ambiguity before about what rules an employer could put on which employees could get a pension. Also
ERISA changed the perceived rules about whether pensions could be invested in venture capital.
Contexts: instititutions
error-correction model: A dynamic model in which "the movement of the variables in any periods is
related to the previous period's gap from long-run equilibrium."
Source: Enders, 1995

Contexts: time series; econometrics; modelling
essentially stationary: A time series process {xt} is essentially stationary iff E[x t2] is uniformly
bounded. (from Wooldridge)
This definition may not be standard or widely used.
I believe this means that even if the variance wanders around and is different for different t, there is a
finite bound to those variances. The variance of the distribution of xt is never infinite for any t and
indeed never exceeds that finite bound. Thus an ARCH-type process might be essentially stationary
even though its variance is not constant for all t.
Note that there are strictly stationary processes that have infinite second moments; such processes are
not essentially stationary.
Source: Wooldridge, 1995, p 2643

estimation:
Relevant terms: 2SLS, 3SLS, acceptance region, AIC, alternative hypothesis, aML, average treatment
effect, BHHH, bias, bootstrapping, Brent method, Breusch-Pagan statistic, BVAR, calibration, censored
dependent variable, Chow test, Cochrane-Orcutt estimation, condition number, consistent, Cook's
distance, Cramer-Rao lower bound, criterion function, critical region, cross-section data, cross-
validation, cubic spline, discrete choice linear model, discrete choice model, Durbin's h test, Durbin-
Watson statistic, econometric model, efficiency, elasticity of substitution, Epanechnikov kernel,
estimator, F distribution, F test, FE, FGLS, FIML, Fisher transformation, fixed effects estimation,
Gaussian kernel, Granger causality, Hausman test, heteroscedastic, heteroskedastic, Hodrick-Prescott
filter, homoscedastic, homoskedastic, Huber standard errors, Huber-White standard errors, ideal, ILS,
impulse response function, incidental parameters, indicator variable, instrumental variables, instruments,
integrated, IV, jackknife estimator, k-nearest-neighbor estimator, Kalman filter, kernel estimation,
kernel function, kitchen sink regression, likelihood function, limited dependent variable, LIML, linear
probability models, linear regression, locally identified, logit model, loss function, m-estimators,
maintained hypothesis, marginal significance level, maximum score estimator, mean squared error,

method of moments, MLE, MSE, Nadaraya-Watson estimator, NLLS, NLREG, noncentral chi-squared
distribution, nonparametric estimation, null hypothesis, output elasticity, p value, panel data, parametric,
partially linear model, piecewise linear, power, Prais-Winsten transformation, probit model, Q-statistic,
QML, quartic kernel, quasi-differencing, quasi-maximum likelihood, random effects estimation, Rao-
Cramer inequality, RATS, reduced form, regression function, rejection region, restricted estimate,
restriction, ridit scoring, robust smoother, roughness penalty, S-Plus, SAS, scatter diagram, score,
SHAZAM, significance, significance level, simulated annealing, simultaneous equation system, size,
smoothers, smoothing, Solas, spatial autocorrelation, spline smoothing, Stata, statistic, Statistica,
structural parameters, SUDAAN, SUR, SURE, survival function, t distribution, t statistic, test for
structural change, test of identifying restrictions, test statistic, time-varying covariates, tobit model,
triangular kernel, truncated dependent variable, TSP, two stage least squares, type I error, type II error,
unbalanced data, uniform kernel, univariate binary model, unrestricted estimate, UVAR, VAR, variance
decomposition, VARs, Wallis statistic, White standard errors, X-11 ARIMA.
Contexts: fields
estimator: A function of data that produces an estimate for an unknown parameter of the distribution
that produced the data.
The way estimators are often discussed, they can be thought of as chosen before the data are seen. This
can be hard to understand for the person new to the term. Properties of estimators (such as unbiasedness
in finite samples, asymptotic unbiasedness, efficiency, and consistency) are discussed without
considering any particular sample, by making assumptions about the distribution of the data, and
considering the estimator in the context of the distributions.
Euler equation: A first order condition that is across a time or state boundary. (Across a state boundary
means a tradeoff between uncertain events.) That is, a first order condition that is a relation between a
variable that has different values in different periods or different states. E.g. k t = b(1+r)kt+1 is an Euler
equation, but 2nt2 - 3kt = 0 is not.
Euler's constant: May refer to either the natural logarithm base e, approximately 2.71828, or to the
Euler-Mascheroni (sp) constant, which is approximately .57721566.
Contexts: mathematics
Eurodollar: "Originally, it was a dollar-denominated deposit created either in a European bank or in the
European subsidiary of an American bank, usually located in London." Here's why: (1) Americans
overseas might want their deposits in dollars; (2) the dollar being the most common international
currency, borrowers and lenders internationally may want to make their accounts in it; (3) the Eurodollar
market was "exempt from reserve requirements and other regulatory costs imposed on domestic
American banks. Superior terms in the Eurodollar market attracted American borrowers and depositors
who would have otherwise patronized domestic institutions." An example of such regulation was the US
Regulation Q which limited interest banks could pay.

Contexts: money; history; finance

Eurosclerosis: a name for the 'disease' of rigid, slow-moving labor markets in Europe in contrast to fast-
moving markets, e.g. in North America.
even function: A function f() is even iff f(x)=f(-x).
event studies: Empirical study of prices of an asset just before and after some event, like an
announcement, merger, or dividend. Can be used to discuss whether the market priced the information
efficiently, whether there was private information, etc.
This method was developed by Fama, Fisher, Jensen, and Roll (1969) according to Weisbach, 1988, p
455
Contexts: finance
evolutionary game theory: Describes game models in which players choose their strategies through a
trial-and-error process in which they learn over time that some strategies work better than others.
Source: Attributed to Samuelson, Larry. 1997. Evolutionary Games and Equilibrium Selection.
Contexts: game theory; micro theory
ex ante: Latin for "beforehand". In models where there is uncertainty that is resolved during the course
of events, the ex antes values (e.g. of expected gain) are those that are calculated in advance of the
resolution of uncertainty.
Contexts: theory; models
ex dividend date: Firms pay dividends to those who are shareholders on a certain date. The next day is
called the ex dividend date. People who own no shares until the ex dividend date do not receive the
dividend. The price of the stocks is often adjusted downward before the start of trading on the ex
dividend date because to compensate for this.
ex post: Latin for "after the fact". In models where there is uncertainty that is resolved during the course
of events, the ex post values (e.g. of expected gain) are those that are calculated after the uncertainty has
been resolved.
Contexts: theory; models
exact:
excess kurtosis: Sample kurtosis minus 3, which means when 'excess kurtosis' is positive, there is
greater kurtosis than in the normal distribution.
Source: Campbell, Lo, and MacKinlay, p 17


excess returns: Asset returns in excess of the risk-free rate. Used especially in the context of the
CAPM. Excess returns are negative in those periods in which returns are less than the risk-free rate.
Contrast abnormal returns.
Contexts: finance
exclusion restrictions: In a simultaneous equation system -- that some of the exogenous variables are
not in some of the equations; often this idea is expressed by saying the coefficient next to that
exogenous variable is zero. This way of putting it may make this restriction (hypothesis) testable, and
may make a simultaneous equation system identified.
exclusive dealing: A requirement in a contract that the buyer will only buy goods of a certain type from
the stated seller.
ExecuComp: data set from Standard and Poors on compensation to American corporate executives,
including stock and options ownership.
Contexts: data; finance
existence value: The value that individuals may attach to the mere knowledge of the existence of
something, as opposed to having direct use of that thing. Synonymous with nonuse value.
For example, knowledge of the existence of rare and diverse species and unique natural environments
may have value to environmentalists who do not actually see them.
Source: Portney, 1994; Krutilla, 1967

exogenous: A variable is exogenous to a model if it is not determined by other parameters and variables
in the model, but is set externally and any changes to it come from external forces. Contrast endogenous.
Contexts: phrases
expectation: There are several, overlapping definitions: 1) The mean of a probability distribution. If the
probability distribution function is F(x) then the mean would be calculated by integrating dF(x) over the
domain of the probability distribution function. The expectation operator, E[], is a linear operator per
Hogg and Craig, 1995, page 55.
2) In a model, the agents may have to anticipate the value of variables whose realizations may occur in
the future. The values they anticipate are often called their expectations. The agents may generalize only
from past realizations in a way that we can call "adaptive expectations" or they may have other
information from which they hypothesize a distribution from which the realization will be drawn. From
such a distribution they can calculate the mean value, and variance, and so forth. This process is one of
"rational expectations." --- Note: the notation Ex[] means the expectation of the expression taken over
the random variable X. The result of the expression could still be a random variable if there are other
random variables in the expression.

Contexts: probability; econometrics; macro
expected utility hypothesis: That the utility of an agent facing uncertainty is calculated by considering
utility in each possible state and constructing a weighted average, where the weights are the agent's
estimate of the probability of each state. Arrow, 1963 attributes to Daniel Bernoulli (1738) the earliest
known written statement of this hypothesis.
Source: Arrow, 1963

Contexts: modelling; utility theory
expected value: The expected value of a random variable is the mean of its distribution.
In its technical use this word does not have exactly the same meaning as in ordinary English. For
example, people buying a lottery ticket that has a 1/10,000 chance of paying $10,000 can expect to get
zero since that is overwhelmingly the likely outcome. They can be certain they won't get $1. But the
expected value of their winnings is $1.
Having said this, it is a standard implementation of 'rational expectations' to assume that agents behave
in response to the expected values of the distributions they face.
expenditure function: e(p,u) -- the minimum income necessary for a consumer to achieve utility level u
given a vector of prices for goods p. (The consumer is presumed to get utility from the goods.)
experience: In the context of studies of employees, length of time employed anywhere. Sometimes
narrowed to include only length of time employed in relevant jobs. Contrast tenure.
Contexts: labor; corporate finance
exponential distribution: A particular function form for a continuous distribution with parameter k, a
scalar real greater than zero. Has pdf f(x)=ke-kx .
The mean is E[x]=1/k, and variance var(x)=1/k 2. Moment-generating function is (1-kt)-1.
exponential family: A distribution is a member of the exponential family of distributions if its log-
likelihood function can be written in the form below.
ln L( | X) = a(X) + b() + c1(X)s1() + c2(X)s2() + . . . + cK(X)sK() where a(), b(), and cj() and sj()
for each j=1 to K are functions;  is the vector of all parameters; X is the matrix of observable data; and
L() is the likelihood function as defined by the maximum likelihood procedure.
The members of the exponential family vary from each other in a(), b(), and the c j()s and s j()s. Most
common named distributions are members of the exponential family.
Quoting from Greene, 1997, page 149: "If the log-likelihood function is of this form, then the functions
cj() are called sufficient statistics [and] the method of moments estimators(s) will be functions of

them," Those estimators will be the maximum likelihood estimators which are asymptotically efficient
here.

exponential utility: A particular functional form for the utility function. Some versions of it are used
often in finance.
Here is the simplest version. Define U() as the utility function and w as wealth. a is a positive scalar
parameter.
U(w) = -e-aw
is the exponential utility function.
Now consider events over time. An agent might have a utility function mapping possible streams of
consumption into utility values. Here is one way this is often parameterized:
Define () as a constant discount rate known to the agent. It's a scalar that is between zero and one, and
usually thought of as near one.
Define t as a time subscript that starts at zero and increases over the integers, either to some fixed T or to
infinity.
Define c(t) as the amount the agent gets to consume at each t, and {c(t)} as the series of consumptions
for all relevant t. c(t) is random here. its value is not known but its distribution is assumed known to the
agent.
Let E[] be the expectations operator that takes means of distributions.
Using this notation a common dynamic version of exponential utility is:

u({ct} = the sum over all t of ()tE[-e-ac(t)]
Whether this utility function describes observed investment decisions is discussable and testable. It is
not often discussed, however. If clear information on that becomes known to this author, it will be added
here.
Most uses of the exponential utility function in finance are driven by these aspects: (a) its analytic
tractability; e.g. that it can be differentiated with respect to choice variables that affect future wealth w
or consumption c(t); (b) for some applications it aggregates usefully, meaning that if every agent has this
exact utility function and they can buy securities then a representative agent can be defined which also
has this analytically convenient form and for whom the securities prices would be the same. It's
convenient for computing securities prices in some abstract economies to use that representative agent.
There are "no wealth effects" -- that is, the amount of risky securities that the agent wants to hold is not
a function of his own wealth, as long as he can borrow infinitely (which is often assumed for tractability
in these models.)
Source: Huang and Litzenberger, 1988

Contexts: modelling; finance
extended reals: Or, extendend real numbers, or extended real line. The set of reals plus the elements
(infinity) and (minus infinity). Addition and multiplication can generally be extended to this set; see
Royden, p. 36
Source: Royden, p. 36

extensive margin: Refers to the range to which a class of resources is allocated to a production process.
Example: the number of employees an employer has. Contrast intensive margin.
Contexts: micro; labor
externality: An effect of a purchase or use decision by one set of parties on others who did not have a
choice and whose interests were not taken into account.
Classic example of a negative externality: pollution, generated by some productive enterprise, and
affecting others who had no choice and were probably not taken nto account.
Example of a positive externality: Purchase a car of a certain model increases demand and thus
availability for mechanics who know that kind of car, which improves the situation for others owning
that model.
F distribution: The F distribution is defined in terms of two independent chi-squared variables. Let u
and v be independently distributed chi-squared variables with u1 and v1 degrees of freedom,
respectively.
Then the statistic: F=(u/u1)/(v/v1) has an F distribution with (u 1,v1) degrees of freedom. As can be
computed from the definition of the t distribution, the square of a t statistic may be written: t 2=(z2/1)/
(v/v1), where z2, being the square of a standard normal variable, has a chi-squared distribution. Thus the
square of a t variable with v1 degrees of freedom is an F variable with (1,v1) degrees of freedom, that is:
t2=F(1,v1).
Source: Johnston, p 530-1

F test: Normally a test for the joint hypothesis that a number of coefficients are zero. Large values
(greater than two?) generally reject the hypothesis, depending on the level of significance required.
f.o.b.: Indicates which services come with a price. Stands for "free on board." Describes a price which
includes goods plus the services of loading those goods onto some vehicle or vessel at a named location,
sometimes put in parentheses after the f.o.b.
Source: William P. Rogers. 1978. The Coal Primer.
factor analysis: An approach to finding what mixture of underlying variables produces most of the
variation in the dependent variable.
For a more complete discussion see http://www.statsoftinc.com/textbook/stfacan.html
factor loadings: "A security's factor loadings are the slopes in a multiple regression of its return on the
factors."

Contexts: finance
factor price equalization: An effect observed in models of international trade -- that the prices of inputs
to ("factors of") production in different countries, like wages, are driven towards equality in the absence
of barriers to trade. This happens among other reasons because price incentives cause countries to
choose to specialize in the production of goods whose factors of production are abundant there, which
raises the prices of the factors towards equality with the prices in countries where those factors are not
abundant. Shocks to factor availability in a country would cause only a temporary departure from factor
price equality.
The basic theorem of this kind is attributed to Samuelson (1948) by Hanson and Slaughter (1999) who
also cite Blackorby, Schworm, and Venables (1993). The context of the theorem is a Heckscher-Ohlin
model.
Source: Hanson, Gordon H., and Matthew J. Slaughter, "The Rybczinski theorem, factor-price
equalization, and immigration: evidence from U.S. states," NBER working paper 7074, April 1999. On
Web at http://www.nber.org/papers/w7074
Samuelson, Paul A. 1948. "International trade and the equalization of factor prices." Economic Journal
48: 163-184.
Blackorby, Charles, William Schworm, and Anthony Venables. 1993. "Necessary and sufficient
conditions for factor price-equalization." Review of Economic Studies 60: 413-434.
Contexts: trade; international
factory system: The production process of having many manufacturing steps done together in ae big
building, not spread out in many places.
Background: The making of manufactured articles like clothing in Britain before 1800 was done in a
distributed way, with goods shipped around a lot between houses and other places for the next step in
the processing to get done. Increasingly it became more common to have building with all the workers
together, not at home, but rather a workplace where the many steps could be done in the same space.
This had several effects that raised efficiency, meaning it produced more output per a given set of
inputs:
(a) it reduced transportation costs, and
(b) it made hierarchical or mutual monitoring of the workers easier, and
(c) it allowed quicker responsive adaptation when the situation changed (e.g. someone was sick or a
machine broke down or a new machine came in).
Among the effects of the rise of the factory system was that more people commuted from home to work.
They had a separate workplace.
Contexts: history; production
fads: The conjecture that market prices for securities take long swings away from their fundamental
values and tend to return to them.
In a time series of data this suggests that "the market price differs from the fundamental price by a
highly serially correlated fad.". This formulation attributed to Shiller(1981, 1994), Summers (1986) and
Poterba and Summers (1988) by Bollerslev and Hodrick (1992) p. 13.
Source: Bollerslev and Hodrick (1992), p 13-14.

Contexts: finance

fair trader: Contrasted with free trader, a holder of the the point of view that one's country's
government must prevent foreign companies from having artificial advantages over domestic ones.
The term dates at least as far back as 1886 Britain, where tariffs were recommended by one point of
view expressed in a Royal Commission report "not to countervail any natural and legitimate advantage
which foreign manufacturers may possess, but simply to prevent our own industries being placed at an
artificial disadvantage by the interference of either home or foreign legislation...." (Carr and Taplin, p
122)
Source: Carr, J.C., and W. Taplin, assisted by A.E.G. Wright. 1962. History of the British Steel Industry.
Oxford: Basil Blackwell.
Contexts: political economy; trade
Fama-MacBeth regression: A panel study of stocks to estimate CAPM or APT parameters
Contexts: finance
family: two or more persons related by blood, marriage, or adoption, and residing together.
Source: Census Bureau, cited in Glen Cain's 1976 Handbook article

Contexts: labor; sociology
FASB: Financial Accounting Standards Board, which sets accounting rules for the US. (public?
private?)
Contexts: accounting; corporate finance; data
fat-tailed: describes a distribution with excess kurtosis.
Fatou's lemma: Let {Xn} for n=1,2,3,... be a sequence of nonnegative real random variables.
Then lim infn->infinity E[Xn] ≥ E[lim infn->infinity Xn].
Source: Durrett, 1996, p 16

Contexts: probability
FCLT: stands for 'functional central limit theorem', and is synonymous with Donsker's theorem.
Briefly: if {et} is a series of independent and mean zero random variables, partial sums (from 1 to T) of
the e's converge to a standard Brownian motion process on [0,1] as T goes to infinity. See other sources
for a proper formal statement.
Source: Richardson and Stock (1989)

FDI: Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct
investment is investment of foreign assets into domestic structures, equipment, and organizations. It
does not include foreign investment into the stock markets. Foreign direct investment is thought to be
more useful to a country than investments in the equity of its companies because equity investments are

potentially "hot money" which can leave at the first sign of trouble, whereas FDI is durable and
generally useful whether things go well or badly.
Contexts: accounting; macro
FE: stands for Fixed Effects estimator. That is, a linear regression in which certain kinds of differences
are subtracted out so that one can estimate the effects of another kind of difference.
Fed Funds Rate: The interest rate at which U.S. banks lend to one another their excess reserves held on
deposit at the U.S. Federal Reserve.
Contexts: money; banking; institutions
FGLS: Feasible GLS. That is, the generalized least squares estimation procedure (see GLS), but with an
estimated covariance matrix, not an assumed one.
fiat money: is intrinsically useless; is used only as a medium of exchange.
fields: Most terms are in one of these categories. You can click on one to see a list of terms relevant to
it.
Relevant terms: agricultural economics, business, cliometrics, data, development, dynamic optimization,
econometrics, economic sociology, estimation, finance, game theory, general equilibrium, history,
information, IO, journals, labor, linear algebra, macro, measure theory, models, organizations, phrases,
probability, public finance, real analysis, statistics, stylized facts, time series, transition economics.
filter: A filter is a way of treating or adjusting data before it is analyzed. Examples are the Hodrick-
Prescott filter or Kalman filter.
More exactly, a filter is an algorithm or mathematical operation that is applied to a time series sample to
get another sample, often called the 'filtered' data. For example a filter might remove some high-
frequency effects from the data; or detrend it; or remove seasonal frequencies but leave monthly
frequencies in.
Contexts: time series; data
FIML: Full Information Maximum Likelihood, an approach to the estimation of simultaneous

equations.
As portrayed in Johnston's book: Define A as the matrix of coefficients in the multiple-equation model,
u as the vector of residuals for each choice of A, and  as the covariance matrix E(uu'). FIML consists
of maximizing ln(L(A, )) with respect to the elements of A and .
Source: Johnston p 490-492

finance: The study of securities, borrowing, and ownership.

Relevant terms: abnormal returns, absolute risk aversion, AGI, Annuity formula, APT, ARCH, Arrow-
Pratt measure, asset pricing models, asset-pricing function, basis point, Black-Scholes equation, bubble,
call option, capital structure, CAPM, CAR, CARs, CCAPM, CDE, certainty equivalence principle,
certainty equivalent, CES utility, coefficient of absolute risk aversion, coefficient of relative risk
aversion, commercial paper, complete market, Compustat, conditional, conditional variance,
conglomerate, consumption beta, contingent valuation, coupon strip, CRRA, CRSP, deep, delta, depth,
derivatives, discount rate, EBIT, efficient markets hypothesis, EGARCH, embedding effect,
entrenchment, equity premium puzzle, Eurodollar, event studies, ex dividend date, excess kurtosis,
excess returns, ExecuComp, existence value, experience, exponential utility, factor loadings, fads,
Fama-MacBeth regression, FASB, fat-tailed, firm, Fisherian criterion, Freddie Mac, free cash flow,
gamma (of options), GARCH, generalized Wiener process, GMM, Gordon model, hold-up problem,
ICAPM, IGARCH, Ito process, Jensen's inequality, JF, JFE, LBO, Lerman ratio, leverage ratio, liquid,
Ljung-Box test, log utility, Lucas critique, market capitalization, market for corporate control, market
price of risk, MBO, Modigliani-Miller theorem, NASDAQ, no-arbitrage bounds, noise trader, nonuse
value, NPV, NYSE, option, par, PDV, portmanteau test, precautionary savings, principal strip, pro
forma, put option, put-call parity, Q ratio, quasi rents, rents, residual claimant, resiliency, risk free rate
puzzle, Roll critique, SCF, semi-strong form, senior, Sharpe ratio, short rate, stable distributions, state
price, state price vector, straddle, strip financing, strips, strong form, submartingale, subordinated,
Survey of Consumer Finances, team production, tenure, term spreads, theta, tightness, Tobin tax,
variance ratio statistic, vega, volatility clustering, weak form, white noise process.
Contexts: fields
FIPS: Federal Information Processing Standards. These are encodings defined by the U.S. government
and used to encode some data (like states and counties) in U.S. data sets. Listings can be found at the
NIST FIPS site.
Source: NIST FIPS web site

Contexts: data; organizations
firm: Defined by Alchian and Demsetz (1972) this way: "The essence of the classical firm is identified
here as a contractual structure with: 1) joint input production [see team production]; 2) several input
owners [e.g. the workers]; 3) one party [the firm or its owners] who is common to all the contracts of the
joint inputs; 4) who has rights to renegotiate any input's contract independently of contracts with other
input owners; 5) who holds the residual claim; and 6) who has the right to sell his central contractual
residual status. The central agent is call the firm's owner and the employer. No authoritarian control is
involved; the arrangement is simply a contractual structure subject to continuous renegotiation with the
central agent. The contractual structure arises as a means of enhancing efficient organization of team
production." ---------- a firm is a hierarchical organization attempting to make profits.
Source: Alchian and Demsetz, 1972, p 794

Contexts: theory of the firm; IO; corporate finance
First Welfare Theorem: The statement that a Walrasian equilibrium is weakly Pareto optimal. Such a
theorem is true in a large and important class of general equilibrium models (usually static ones). The
standard case is if every agent has a positive quantity of every good, and every agent has a utility
function that is convex, continuous, and strictly increasing, the then the First Welfare Theorem holds.

first-order stochastic dominance: Usually means stochastic dominance.
fiscalist view: An extreme Keynesian view, that money doesn't matter at all as aggregate demand
policy. Assumes that investment demand does not respond to interest rate changes. Relevant only in
depression conditions (Branson, p 386).
Source: Branson
Contexts: macro
Fisher consistency: This is a necessary condition for maximum likelihood estimation to be consistent.
Maximizing the likelihood function L gives an estimate for parameter b that is Fisher-consistent if: E[d
(ln L)/db]=0 at b=b0, where b0 is the true value of b.
Another interpretation or phrasing: "An estimation procedure is Fisher consistent if the parameters of
interest solve the population analog of the estimation problem." (Wooldridge).
Source: Wooldridge, 1995, p 2648.

Fisher effect: That in a model where inflation is expected to be steady, the nominal interest rate changes
one-for-one with the inflation rate; see Fisher equation. The empirical analogy is the Fisher hypothesis.
Fisher equation: nominal rate of interest = real rate of interest + inflation
Fisher hypothesis: That the real rate of interest is constant. So the nominal rate moves with inflation.
The real rate of interest would be determined by the time preferences of the public and technological
constraints determining the return on real investment.
Source: G. Thomas Woodward, Review of Economics and Statistics, 1992, p 315

Fisher Ideal Index: The "geometric mean of the fixed-weighted Paasche and Laspeyres indexes."
Proposed as a price index by Irving Fisher in 1922. This is a superlative index number formula. --
Triplett, 1992.
Source: Triplett, 1992, p. 50

Contexts: index theory; macro; prices
Fisher index: A price index, computed for a given period by taking the square root of the product of the
the Paasche index value and the Laspeyres index value.
Source: http://www.geocities.com/jeab_cu/paper2/paper2.htm;
Gordon, 1990, p. 5

Fisher information: The Fisher information is an attribute or property of a distribution with known
form but uncertain parameter values. It is only well-defined for distributions satisfying certain
assumptions. It is a (k x k) matrix, where k is the number of elements in a vector of parameters b. Thus,
for parameter b of pdf f(x):
I(b)=E{ [f'(x)/f(x)]2 | b}
That's from DeGroot. I think this is the same as in Greene p 96:
I(b)=E[{d/db(ln L(b))}2]
=-E[d2/db2(ln L(b))]
If the Fisher information is 'large' then the estimated distribution will change radically as new data (x)
are incorporated into the estimate of the distribution by maximum likelihood. The Fisher information is
the main ingredient in the Cramer-Rao lower bound, and in some maximum likelihood estimators.
Source: DeGroot; Greene, 1993, p 96

Fisher transformation: Hypotheses about the value of , the correlation coefficient between variables x
and y of the underlying population, can be tested using the Fisher transformation of a sample's
correlation coefficient r. Let N be the sample's size. This transformation is defined by: z = 0.5 * ln
( (1+r)/(1-r) ) z is approximately normally distributed with mean , and standard error 1/((N-3)^0.5).
This is a common way of testing whether a correlation coefficient is significantly different from 0, and
hence ascribing a p-value. ------ [Editor: We suspect that for x and y bivariate normal the distribution
works exactly in all sample sizes, otherwise only asymptotically.] [See Kennedy, p 369. Bickel and
Dobson, "Mathematical Statistics: Basic Ideas and selected topics" page 221 also gives derivation, but
makes no mention of any distribution requirements.]
Source: stephenb@nwu.edu
With thanks to: Stephen Brown (as of 4/25/99: stephenb@nwu.edu)
Fisherian criterion: for optimal investment by a firm -- that it should invest in real assets until their
marginal internal rate of return equals the appropriately risk-adjusted rate of return on securities
Source: Miller and Rock, Journal of Finance Sept 1985, p. 1032

fixed effects estimation: A method of estimating parameters from a panel data set. The fixed effects
estimator is obtained by OLS on the deviations from the means of each unit or time period. This
approach is relevant when one expects that the averages of the dependent variable will be different for
each cross-section unit, or each time period, but the variance of the errors will not. In such a case
random effects estimation would give inconsistent estimates of b in the model: y = Xb + e
The fixed effects estimator is: (X'QX)-1X'Qy
where Q is the matrix that "partials out" the averages from the groups that have different variances.
Example: Define L as I N x 1T, where x is the Kronecker cross product operator, T is the number of time
periods, and N is the number of cross-section units (individuals, say). Now individual effects can be
screened out by premultiplying the model's equation by Q and running OLS, or equivalently using the
estimator equation above. Thus estimating b.

flexible-accelerator model: A macro model in which there is a variable relationship between the
growth rate of out put and the level of net investment. The relation between the change in output and the
level of net investment is the accelerator principle.
Source: Branson, Ch 13
Contexts: macro
fob: An occasional compressed form of f.o.b..
Folk theorem: The theorem is that a Nash equilibrium exists in repeated games in which sufficiently
patient players to reach Pareto optimal payoffs in a Nash equilibrium. (Fudenberg and Tirole, p 150,
describes the achievable payoffs as the individually rational ones, not the Pareto optimal ones.) The
strategies that achieve this often have the pattern that they 'punish' the other player at length for any
defection from the Pareto optimal choice. In equilibrium that encourages the other player not to defect
for a short term gain.
Source: Fudenberg and Tirole, _Game Theory_

Frechet derivative: Informally: A derivative (slope) defined for mappings from one vector space to
another.
The first e in Frechet should have an accent aigu.
Formally (this taken more or less directly from Tripathi, 1996):

Let T be a transformation defined on an open domain U in a normed space X and mapping to a range in a
normed space Y.
(Does normed space mean normed vector space? Or might it not?)
Holding fixed an x in U and for each h in X, if a linear and continuous operator L (mapping from X to Y)
exists such that:
lim||h|| falls to 0 (1/||h||) * (||T(x+h)-T(x)-L(h)||) = 0
Then the operator L, often denoted T'(x), is the Frechet derivative of T() and we can say T is Frechet
differentiable at x. (Ed.: I believe any such L is unique.)

Contexts: mathematics; real analysis
Frechet differentiable: Informally: A possible property of mappings from one space to another. For
such a transformation, a Frechet derivative may exist at each point and if so we say the transformation is
Frechet differentiable at that point.
Properly the first e in Frechet should have an accent aigu.
See the entry at Frechet derivative for a formal definition.

Contexts: mathematics; real analysis
Freddie Mac: Shorthand for U.S. Federal Home Loan Mortgage Corporation.
Contexts: data; finance
free cash flow: cash flow to a firm in excess of that required to fund all projects that have positive net
present values when discounted at the relevant cost of capital.
Free cash flow can be a source of principal-agent conflict between shareholders and managers, since
shareholders would probably want it paid out in some form to them, and managers might want to control
it, e.g. to use it for unprofitable projects, for perquisites, to make acquisitions, to create jobs for friends
and allies, and so forth. A possible partial solution to the conflict for the shareholders is for the company
to have heavy debts on which frequent, heavy payments are due. Those payments keep the managers
focused on delivering consistent revenues and clear out the extra cash.
Source: Jensen (86)

Contexts: micro; finance
free entry condition: An assumption posited in a search and matching model of a market. The
assumption is that there is no institutional constraint on firms entering the market (e.g. to hire workers).
There is no fixed number of firms. The number of firms is determined in equilibrium, by the costs of
starting up.
Contexts: macro; labor
free reserves: excess reserves minus borrowed reserves (Branson, p 353).
Source: Branson, p 353

Contexts: money
free trader: Holder of the political point of view that the best policy is to allow free trade into one's
own country.
Contexts: political economy; trade
frequency function: The frequency function is the probability of drawing each particular value from a
discrete distribution: p(x) = Pr(X=x). Here X is the random variable and x is one of its possible values.
frictional unemployment: Unemployment that comes from people moving between jobs, careers, and
locations. Contrast structural unemployment.
Source: Baumol & Blinder

Friedman rule: In a cash-in-advance model of a monetary system, the Friedman rule for monetary
policy is to deflate so that it is not costly to those who have money to continue to hold it. Then the cash-
in-advance constraint isn't binding on them.
Contexts: money

FTC: Abbreviaton for the U.S. national Federal Trade Commission, which rules in some circumstances
on some antitrust regulations. See also FTC.
Contexts: IO; regulation; antitrust
FTC Act: A 1914 U.S. law creating a regulatory body for antitrust, price discrimination, and regulation.
Section five says "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts
or practices in or affecting commerce, are hereby declared unlawful."
functional: a mapping from paths of functions to the reals (e.g. a value function defined by a mapping
from possible paths of choices)
functional equation: an equation where the unknown is a function. Example: a value function is the
solution to the equation that sets the value function equal to the present discounted value of the current
period's utility and the discounted value function of next period's state.

fungible: "Being of such a nature or kind that one unit or part may be exchanged or substituted for
another unit or equal part to discharge an obligation."
Examples: money or grain. Not examples: works of art.
Source: American Heritage Dictionary, 1982

Contexts: money
future-oriented: A future-oriented agent discounts the future lightly and so has a LOW discount rate, or
equivalently a HIGh discount factor. See also present-oriented, discount rate, and discount factor.
Contexts: models
FWL theorem: Given a statistical model y = X1b1 + X2b2+ e

where
y is a vector of values of a dependent variable,
the X's are linearly independent matrices of predetermined variables, and
the e's are errors, we could premultiply the equation by M 1=I-X1(X1'X1)-1X' which projects vectors in
the space spanned by X1 to zero, and run OLS on the resulting equation M1y = M1X2b2+ M1e
and (the theorem says) would get exactly the same estimate of b 2 that OLS on the first equation would
have given.
This use of premultiplying is used in the derivation of many estimators: notably IV estimators and FE
estimators.

game: A game is a model with (1) players who make (2) strategy (or action) choices in a (3) predefined
time order, and then (4) receive payoffs, which are usually conceived of in money or utility terms.
Classic games are the Prisoner's Dilemma, Matching Pennies, the Battle of the Sexes, the dictator game,
the ultimatum game, the Bertrand game, and the Cournot game.
game theory:
Relevant terms: Bertrand competition, Bertrand game, bounded rationality, cooperative game, Cournot
game, decision rule, dictator game, dynamic inconsistency, epsilon-equilibrium, epsilon-proper
equilibrium, evolutionary game theory, Folk theorem, game, implementable, implicit contract, interim
efficient, Markov perfect, Markov strategy, Matching Pennies, mechanism design, Nash equilibrium,
Nash product, Nash strategy, NBS, NE, noncooperative game, normal form, payoff matrix, PBE, perfect
Bayesian equilibrium, perfect equilibrium, principal-agent, principal-agent problem, Prisoner's
Dilemma, proper equilibrium, rationalizable, screening game, sharing rule, signaling game, solution
concept, SPE, strategic form, strategy-proof, subgame perfect equilibrium, tit-for-tat, totally mixed
strategy, trembling hand perfect equilibrium, ultimatum game, winner's curse, zero-sum game.
Contexts: fields
gamma (of options): As used with respect to options: The rate of change of the portfolio's delta with
respect to the price of the underlying asset. Formally this is a partial derivative.
A portfolio is gamma-neutral if it has zero gamma.

Contexts: finance
gamma distribution: A distribution relevant to, for example, waiting times. Expression of its pdf
requires reference to the gamma function which will be called GAMMA(a) here. (When HTML
supports math a better display will be possible.) The gamma distribution's pdf has parameters a>0 and
b>0, and GAMMA(a) is also greater than zero. The support is on x>0:
f(x)=[xa-1e-x/b]/[GAMMA(a)ba]

gamma function:
A function of a real a>0. It is the integral over y from zero to infinity of y a-1e-y dy. This integral is the
gamma function of a, GAMMA(a). (When HTML supports math a better display will be possible.) The
gamma distribution is a function that includes the gamma function.

GARCH: Generalized ARCH. First paper may have been Bollerslev, 1986, Journal of Econometrics

Source: Bollerslev, 1986, Journal of Econometrics

GARP: abbreviation for the Generalized Axioms of Revealed Preference.

Contexts: models
Gauss: A matrix programming language and programming environment. Made by Aptech.
Contexts: data; simulation
Gaussian: an adjective that describes a random variable, meaning it has a normal distribution.
Gaussian kernel: The Gaussian kernel is this function: (2PI)-.5exp(-u2/2). Here u=(x-xi)/h, where h is
the window width and xi are the values of the independent variable in the data, and x is the value of the
independent variable for which one seeks an estimate. Unlike most kernel functions this one is
unbounded on x; so every data point will be brought into every estimate in theory, although outside
three standard deviations they make hardly any difference.

Gaussian white noise process: A white noise process with a normal distribution.
Contexts: models; statistics; econometrics; time series
GDP: Gross domestic product. For a region, the GDP is "the market value of all the goods and services
produced by labor and property located in" the region, usually a country. It equals GNP minus the net
inflow of labor and property incomes from broad. -- Survey of Current Business
A key example helps. A Japanese-owned automobile factory in the US counts in US GDP but in
Japanese GNP. "GDP can be calculated from output statistics, income statistics or as the sum of private
expenditures, public expenditures and net exports." (Bohlin, 2003). Measured output from one sector
that immediately became an input into another productive sector is not supposed to count; one subtracts
them out, to get only the value-added by each productive sector.
Source: Survey of Current Business; Bohlin, Jan. "Swedish historical national accounts: The fifth
generation." European Review of Economic History, 7:1 (April, 2003): 73-97.
Contexts: macro; government
GDP deflator: A measure of the cost of goods purchased by U.S. households, government, and
industry. Differs conceptually from the CPI measure of inflation, but not by much in practice.
Contexts: macro; labor; data

GEB: An abbreviation for the journal Games and Economic Behavior.
Contexts: journals
general equilibrium:
Relevant terms: budget set, clears, consumption set, contract curve, core, demand set, endowment, First
Welfare Theorem, government failure, individually rational, locally nonsatiated, market failure, netput,
offer curve, Pareto set, production set, real externality, Second Welfare Theorem, social planner, SPO,
strongly Pareto Optimal, subdifferential, Walrasian equilibrium, Walrasian model, WE, weakly Pareto
Optimal, WPO.
Contexts: fields
generalized linear model: A model of the form y=g(b'x) where y is a vector of dependent variables, x
is a column vector of independent variables, b' is a row vector of parameters (that is, b is not a function
of x) and g() is a possibly random function called a link function.
Examples: linear regression (y=b'x+errs) and logistic regression y=1/(1+e-x)+errs.
An example that is not in the class of generalized linear models is: y=x1*x2.
Source: Rabe-Hesketh, Sophia, and Brian Everitt. 1999. A Handbook of Statistical Analyses using Stata.
Chapman & Hall / CRC. pp 91-93.
Generalized Method of Moments: See GMM.
generalized Ozaki cost function: This is a very general form of cost function defined by Nakamura
(1990), p. 650, citing earlier work by Ozaki. Nakamura's article details its many virtues, one of which is
that homotheticity is not imposed -- that is, if the optimal use of inputs is not the same at different scales
of output, this function can express that. (The mainline case of this is when there is a fixed input
requirement at the beginning, or the input comes in indivisible chunks.)
Equation (3) in that article defines the cost function which is displayed here as best this editor can do it.
The Generalized-Ozaki cost function's expression for the cost of producing output y, at date t, given a
vector of m input prices p[] which are indexed by i=1 to m, is:
c(p,y,t) = i bii ybyiexp(btit)pi + i<>j bij (pipj).5 ybyexp(btt)
[your editor's comments, clarifications, and interpretations follow, with imperfectly suppressed
frustration.]
The notation is murderously difficult here. I do not fully understand it but can clarify some things. First,
any element with a 'b' in it is a parameter that could be estimated. In particular:
(a) 'byi' is meant to look like byi , but neither html (apparently) nor even the 1990 Review of Economics
and Statistics could put subscripts in a superscript. (TeX can, so one might be wise to use that, if
jumping off this particular ledge.) One worries, though: how many parameters does byi represent? m, I
think. The y is hard-coded, doesn't index. And I goes from 1 to m. In Nakamura's example, m=3, by the
way. So perhaps m is never meant to be big.

(b) Analogously, 'by' represents by, which is probably a scalar parameter. Probably b t is also a scalar. bti
is probably an m-vector collectively called b t. And bij and bii could be combined in a m x m matrix.
(c) exp(z) means the constant e taken to the power of z. Expressing this as e z would have been nice but
the typeface is already cracking under the strain.
(d) The notation i<>j is not obvious. (<> means not-equal here; the original article has a nice not-equals
sign.) I'd guess it means the same as
i=1m{ j=1,i<>j m (expression)}
I grasp that's not transparent either. But the index variable is ambiguous in the original expression. It's
possible that we were supposed to think the second  was part of the first (though parentheses would
have been required to make that clear) and that the index variable on the second  was j.
Source: Nakamura, Shinichiro. 1990. "A nonhomothetic generalized Leontief cost function based on
pooled data". Review of Economics and Statistics 72:4 (Nov, 1990), 649-656.
http://links.jstor.org/sici?sici=0034-6535%28199011%2972%3A4%3C649%3AANGLCF%3E
2.0.CO%3B2-0
Ozaki, Iwao, "Economics of Scale and Input Output Coefficients," in A. Carter and A. Brody (eds.)
Applications of Input Output Analysis (Amsterdam: 1969), North-Holland, 280-302.
Ozaki, Iwao, "The Effects of Technological Change on the Economic Growth of Japan," in K. Polenske
and J. Skolka (eds.) Advances in Input Output Analysis (Cambridge, MA: 1976), Ballinger, 93-111.
generalized Tobit: Synonym for Heckit.
generalized Wiener process: A continuous-time random walk with a drift and random jumps at every
point in time (roughly speaking). Algebraically:
a(x,t)dt + b(x,t)c(dt).5
describes a generalized Wiener process, where:
a and b are deterministic functions
t is a continuous index for time
x is a set of exogenous variables that may change with time
dt is a differential in time
c is a random draw from a standard normal distribution at each instant
Source: Hull, 1997

Contexts: time series; finance; statistics; models
generator function: in a dynamical system, the generator function maps the old state N t into new state

Nt+1 E.g. Nt+1 = F(Nt).

A steady state would be an N* such that F(N*) = N*.

Contexts: macro
geometric mean: Geometric mean is a kind of average of a set of numbers that is different from the
arithmetic average. The geometric mean is well defined only for sets of positive real numbers.
Geometric mean of A and B is the square root of (A*B). The geometric mean of A, B, and C is the cube
root of (A*B*C). And so forth. Contrast this to the arithmetic means, which are .5*(A+B) and .333*
(A+B+C).
GEV: abbrevation for Generalized Extreme Value distribution. The difference between two draws of
GEV type 1 variables has a logistic distribution, which is why a GEV distribution for errors gets
assumed in certain binary econometric models.
GGH preferences: Refers to a paper by Greenwood, Hercowitz, and Huffman (1988) with utility
functions across agents and across time by:
u(Cit, Nit) = C it - Nitb
where a>0 and b>1 are constants, and Cit and Nit stand for consumption and hours worked by each agent
i at date t.
-- this utility function has Gorman form and so it aggregates
-- it has been successful at matching cross-section data relative to other functions that do.
Source: Greenwood, J., Z. Hercowitz, and G. Huffman, (1988), "Investment, Capacity Utilization, and
the Real Business Cycles", AER, 78 402-417.
Contexts: models; macro
Gibbs sampler: A way to generate empirical distributions of two variables from a model. Say the model
defines probability distributions F(X|Y) and G(Y|X). Then start with a random set of possible X's, draw
Y's from G(), then use those Y's to draw X's, and so on indefinitely. Keep track of the X's and Y's seen,
and this will give samples enough to find the unconditional distributions of X and Y.
Source: talk by Moshe Buchinsky at Northwestern 10/29/1996 regarding research of his with Phillip
Leslie
Contexts: econometrics; simulation
Gibrat's law: A descriptive relationship between size and growth -- that the size of units and their
growth percentage statistics are statistically independent. Sometimes Gibrat's law is thought to apply to
large firms, and sometimes to cities (Gabaix, May 1999 American Economic Review, page 130).
Gini coefficient: This is another name for the Gini index. This editor prefers "Gini index" because the
word "coefficient" implies that the number's meaning depends on multiplying it by something, or that it
came out of a regression.

Gini index: A number between zero and one that is a measure of inequality. An example is the
concentration of suppliers in a market or industry.
The Gini index is the ratio of the area under the Lorenz curve to the area under the diagonal on a graph
of the Lorenz curve, which is 5000 if both axes have percentage units. The meaning of the Gini index: if
the suppliers in a market have near-equal market share, the Gini index is near zero. If most of the
suppliers have very low market share but there exist one or a few supplies providing most of the market
share then the Gini index is near one.
In labor economics, inequality of the wage distribution can be discussed in terms of a Gini index, where
the wages of subgroups are fractions of the total wage bill.
The Gini index is sometimes called the Gini coefficient.
Source: Greer, 1992, p 174

Contexts: IO; labor
Glass-Steagall Act: A 1933 United States national law separating investment banking and commercial
banking firms. Also prohibited banks from owning corporate stock. It was designed to confront the
problem that banks in the Great Depression collapsed because they held a lot of stock.
Source: Glasner, p 198

Contexts: history; IO
GLS: Generalized Least Squares. A generalization of the OLS procedure to make an efficient linear
regression estimate of a parameter from a sample in which the disturbances are heteroskedastic. That is,
in
y = Xb + e (equation 1)
that the e's vary in magnitude with the X's.
The estimator of b is: (X'O-1X)-1X'O-1y (equation 2)
where O, standing for omega, is the covariance matrix. (As you see in the estimator, the covariance
matrix is assumed to be invertible.)
The procedure to derive this is to multiply through the first equation by the square root of the inverse of
the covariance matrix (which assumed to be known; if it estimated, one calls this procedure FGLS, for
feasible GLS.) Then take OLS of the resulting equation.
GMM: Stands for Generalized Method of Moments, an econometric framework of Hansen, 1982. It is
an approach to estimating parameters in an economic model from data. Used often to figure out what
standard errors on parameter estimates should be.
Source: Hansen, 1982

Contexts: econometrics; macro; finance
GNP: Gross national product. The GDP is "the market value of all the goods and services producted by
labor and property belonging to the region, usually a country. It equals GDP plus the net inflow of labor
and property incomes from broad. A Japanese-owned automobile factory in the US counts in US GDP
but in Japanese GNP.

Source: Survey of Current Business

Contexts: macro
Golden Rule capital rate: f'(k*)=(1+n) where k* is optimal capital stock, f() is the aggregate production
function, and n is population growth rate. f(k)-k is consumed by the population. 'Golden Rule' may refer
to a Solow fairy tale.
Contexts: macro
good: A good is a desired commodity.
goodwill: The accounting term to describe the premium that acquiring companies pay over the book
value of the firm being acquired. Goodwill can include value for R&D and trademarks.
Contexts: accounting
Gordon model: Of a stock price. From M. R. Gordon (1962). This model is sometimes used as a
baseline for comparison or for intuition.
Assume a constant rate of return r, and a constant dividend growth rate g. Define P t to be the price of the
stock in period t, and Dt to be its dividend in period t. Implication is that price of stock P t = Dt/(r-g).
Source: Bollerslev-Hodrick 1992; Gordon 1962 ref'd directly there

Contexts: finance
Gorman form: A utility function or indirect utility function is in Gorman form if it is affine with
respect to some argument. Which argument should be clear from context. E.g.:
Ui(xi, z) = A(z)xi + Bi(z)
Here the utility Ui for individual i is is affine in argument x i. A critical implication is that the sum of
Gorman form utility functions for individuals is a well-defined aggregate utility function under some
conditions.

Contexts: models; utility
government failure: A situation, usually discussed in a model not in the real world, in which the
behavior of optimizing agents in a market with a government would not produce a Pareto optimal
allocation. The point is not that a particular government had, or would have, failed at something, but that
the problem abstractly put cannot be perfectly solved by the government. The most common source of
government failures in models is private information among the agents.
Contexts: general equilibrium; public
Granger causality: Informally, if one time series helps predict another, we can say it Granger causes
the other. The original definition, for linear predictors, is in Granger, 1980. From Sargent: A stochastic
process zt is said NOT to Granger-cause a random process xt if E(xt+1 | xt,xt-1,...,zt,zt-1,...) = E(xt+1 |
xt,xt-1,...) *** NOTE in J Pehkonen, Applied Economics, 1991, 23, 1559-1568, p. 1560. *** Expert
treatment of this subject and more formal, less ambiguous definitions are in Chamberlain, Econometrica,

May 82

Grenander conditions: Conditions on the regressors under which the OLS estimator will be consistent.
The Grenander conditions are weaker than the assumption on the regressor X that lim n->infinity(X'X)/n is
a fixed positive definite matrix, which is a common starting assumption.
See Greene, 2nd ed, 1993, p 295.

Gresham's Law: Some version of "Bad money will drive out good." I think the context is that if there
are two suppliers of the same money (e.g. if one of them is a counterfeiter) or of two monies with a fixed
exchange rate between them (per Hayek, Denationalization of Money, 1976 p. 39), there will be a
tendency for overproduction and that the actual money stock will be made up of the bad, or less
valuable, one. (Another situation is if one supplier makes coins that are 90% gold and the other has the
option of making coins with less gold, Bertrand competition for coins would drive the gold fraction
down over time.)
Contexts: money
GSOEP: German Socio-Economic Panel. A German government database going back to at least 1984.
H index: Stands for Herfindahl-Hirschman index, which is a way of measuring the concentration of
market share held by particular suppliers in a market. It is the sum of squares of the percentages of the
market shares held by the firms in a market. If there is a monopoly -- one firm with all sales, the H index
is 10000. If there is perfect competition, with an infinite number of firms with near-zero market share
each, the H index is approximately zero. Other industry structures will have H indices between zero and
10000.
Tirole's version is bounded between zero and one because each of the market shares is between zero and
one.
Source: Greer, 1992, p 177; Tirole, _The Theory of Industrial Organization_

Contexts: IO
Habakkuk thesis: That high wages and labor scarcity stimulated technological progress in the U.S. in
the 1800s, and in particular brought about the American system of manufacturing based on
interchangeable parts. (This description from Mokyr, 1990; idea from Habakkuk, 1962).
Source: Mokyr, 1990, p 165; Habakkuk, 1962, American and British Technology in the Nineteenth
Century
Contexts: history
Hahn problem: Hahn (1965) question: when does there exist an equilibrium in a model in which
money has positive value?

Hansen's J test: See J statistic
Source: Ogaki, 1993

Harrod-neutral: The effect on a production function description of certain kinds of technical change.
Harrod-neutrl is a synonym for labor-augmenting, in practice.
Uzawa (1961), pp. 117-8, has perhaps the earliest use, which cites 1937 and 1948 works of Harrod for
the idea.
Source: Romer, 1996, p 7, and in the bibliography where Harrod's works are cited directly.
Hamermesh, 1993,1996, p 349
Uzawa, H. "Neutral Inventions and the Stability of Growth Equilibrium." The Review of Economic
Studies 28:2 (Feb., 1961), 117-124. JSTOR link to Uzawa (1961)
Contexts: macro; technology; production
Hausman test: Given a model and data in which fixed effects estimation would be appropriate, a
Hausman test tests whether random effects estimation would be almost as good. In a fixed-effects kind
of case, the Hausman test is a test of H0: that random effects would be consistent and efficient, versus
H1: that random effects would be inconsistent. (Note that fixed effects would certainly be consistent.)
The result of the test is a vector of dimension k (dim()) which will be distributed chi-square(k). So if
the Hausman test statistic is large, one must use FE. If the statistic is small, one may get away with RE.
hazard rate: escape rate; rate of transition out of current state
Heaviside function: Is a mapping from the real line to {0, 1}, denoted (at least sometimes) hv(x). hv(x)
is zero for x<0, and is one for x>=0.
Source: Cox and Hinkley (1974, 1995), p 167

Heckit: An occasional name for generalized Tobit. This approach allows a different set of explanatory
variables to predict the binary choice from those which predict the continuous choice. (The data
environment is one in which the continuous choice is measured only when the binary choice is nonzero -
- e.g., if we have data on people, whether they bought a car, and how expensive it was, we can estimate
a statistical model of how expensive a car other people would buy, but only on the basis of the ones who
did buy a car in the data sample.) A regular, non-generalized Tobit constrains the two sets of variables to
be the same, and the signs of their effects to be the same in the two estimated equations. 'Heck' is for
James Heckman.
-- Christopher Baum, Boston College economics department, 20 May 2000, in a broadcast to the

statalist, the email list of people interested in the software Stata.
Heckman two-step estimation: A way of estimating treatment effects when the treated sample is self-
selected and so the effects of the treatment are confounded with the population that chose it because they
expected it would help -- the classic example is that college educations may be selected by those most
likely to benefit.
Taking that example, we wish to advance past the following regression:

wi = a + bXi + dCi + ei
where i indexes people, wi is the wage (or other outcome variable) for agent i, X i are variables
predicting i's wage, and Ci is 1 if i went to college and 0 if not. ei is the remaining error after least
squares estimation of a, b, and d.
Source: Greene, 1997; James Heckman, "Sample selection bias as specification error", Econometrica,
47, 1979, pp 153-161.
Heckscher-Ohlin model: A model of the effects of international trade. "The Heckscher-Ohlin

framework typically is presented as a two-country, two-good, two-factor model. The two countries are
assumed to share identical, homothetic tastes for the two substitutable goods and identical, constant-
returns-to-scale technologies with some factor substitutability. Perfect competition prevails in each
market with zero transport costs and no artificial barriers to international trade in goods, although factors
are internationally immobile. In this framework, each country will (incompletely) specialize in
production and export the good using intensively in production the factor that the country has in relative
abundance." That effect is called factor-price equalization across countries, and is used sometimes to
explain how rising international trade would lead to greater income inequality in the most developed
countries. (from Bergstrand, Cosimano, Houck, and Sheehan, 1994, p 3)
The reference in the name is to "Scandinavian economists Eli Heckscher and Bertil Ohlin early in [the
twentieth century]" in work that is rarely cited directly. (from Bluestone, 1994, p 336).
hedonic: of or relating to utility. (Literally, pleasure-related.) A hedonic econometric model is one

where the independent variables measure attributes of what is to be exchanged; e.g. various qualities of a
product that one might buy or of a job one might take. The measured qualities form a bundle of
attributes which are combined in the resulting product. Each attribute can be thought of as affecting the
price, either independently or in particular combinations with other attributes, and these effects can be
estimated.
A hedonic model of wages might correspond to the idea that there are compensating differentials -- that
workers would get higher wages for jobs that were more unpleasant.
"A product that meets several needs, or has a variety of features ... generates a number of hedonic
services. Each one of these services can be thought of as generating its own demand, along with a
resulting hedonic price. Although each separate component is not observable, the aggregation of all the
components results in the observed product demand and equilibrium price.... [Q]uality improvements
will appear to an observer as an outward shift of the product demand curve, as consumers are willing to
purchase more at the prevailing price." -- William J. White, "A Hedonic Index of Farm Tractor Prices:

1910-1955", Ohio State University working paper, October 1998, pp. 3-4.
help: A list of fields contained here is below. There is some other advice at this help page:
http://econterms.com/help.html
Most terms are in one of these categories. You can click on one to see a list of terms relevant to it.
Relevant terms: agricultural economics, business, cliometrics, data, development, dynamic optimization,
econometrics, economic sociology, estimation, finance, game theory, general equilibrium, history,
information, IO, journals, labor, linear algebra, macro, measure theory, models, organizations, phrases,
probability, public finance, real analysis, statistics, stylized facts, time series, transition economics.
Herfindahl-Hirschman index: See 'H index'.
Contexts: IO
Hermite polynomials: The Hermite polynomials are a series of polynomials defined for each natural
number r, used for statistical approximations I believe. Click here for the equation and graphs of the first
several.
Hessian: The matrix of second derivatives of a multivariate function. That is, the gradient of the
gradient of a function. Properties of the Hessian matrix at an optimum of differentiable function are
relevant in many places in economics: 1) In maximum likelihood estimation, the information matrix is (-
1) times the Hessian.
Contexts: optimization; linear algebra
heterogeneous process: A stochastic process is heterogeneous if it is not identically distributed every

period.
heteroscedastic: An alternate spelling of heteroskedastic. McCulloch (1985) argues that the spelling
with the k is preferred, on the basis of the pronunciation and etymology (Greek not French derivation) of
the term.
Source: J. Huston McCulloch. 1985. "On heteros*edasticity" Econometrica 53:2 (March, 1985), p 483.
With thanks to: Shazam web site which cited McCulloch
heteroskedastic: An adjective describing a data sample or data-generating process in which the errors
are drawn from different distributions for different values of the independent variables.
Most commonly this takes the form of changes in variance with the magnitude of X. That is, in
y = Xb + e
that the e's vary in magnitude with the X's. (An example is that variance of income across individuals is
systematically higher for higher income individuals.)

If the errors are drawn from different distributions, or if higher moments of the error distributions vary
systematically, these are also forms of heteroskedasticity.
Hicks-Kaldor criterion: For whether a cost-benefit analysis supports a public project. The criterion is
that the gainers from the project could in principle compensate the losers. That is, that total gains from
the project exceed the losses. The criterion does not go so far as the Pareto criterion, according to which
the gainers would in fact have to compensate the losers.
Source: Layard and Glaister, p 6

Contexts: public
Hicks-neutral: An attribute of an effectiveness variable in a production function. The attribute is that it

does not affect labor differently from the way it affects capital.
The canonical example is the Solow model production function Y=AF(K,L). There Y is output, L labor,
K capital, F a production variable, and A represents some kinds of effectiveness variable. In Y=F(AK,L)
the effectiveness variable affects capital but not labor. In Y=F(K,AL) it affects labor but not capital.
These two cases can be described as Hicks-biased. In Y=AF(K,L) it is Hicks-neutral.
Source: Romer, 1996, p 7, Hulten, 2000

Contexts: macro
Hicks-neutral technical change: Given a production function AF(K,L) changes in A are Hicks-neutral,
meaning that they do not affect the optimal choice of K or L. The subject comes up in practice only for
aggregate production functions.
Uzawa, H. "Neutral Inventions and the Stability of Growth Equilibrium," The Review of Economic
Studies 28:2 (Feb., 1961), 117-124 contains the first known published use of the adjective 'Harrod
neutral' According to it, the criterion of Harrod-neutrality comes from
Harrod, Roy F., "Review of Joan Robinson's Essays in the Theory of Employment," Economic Journal,
vol. 47 (1937), 326-330.
Uzawa also proves that AF(K,L) and F(K,AL) are the right functional forms to meet Hicks and Harrod-
neutrality, and that only the Cobb-Douglas form accomplishes both.
Hicksian demand function: h(p,u) -- the amount of a good that demanded by a consumer given that it
costs p per unit and that the consumer will have utility u from all goods. h(p,u) is the cost-minimizing
amount.

Contexts: micro
High School and Beyond: A panel data set on U.S. high school students.
Contexts: data

high-powered money: reserves plus currency
Source: Branson
Contexts: money
Hilbert space: A complete normed metric space with an inner product. So the Hilbert spaces are also
Banach spaces. L 2 is an example of a Hilbert space. Any Rn with n finite is another.
Source: Royden p. 245

history: The subject of economic history is anything in history that is subject to economic explanations.
Application of formal theory or statistical analysis of data may be relevant, although it is possible to
make a contribution without either, e.g. with a case study or a contextual reinterpretation. Historians
tend to be focused on what happened, how, and why, not on the question of whether a model fits the
evidence.
Relevant terms: bank note, bill of exchange, Bretton Woods system, climacteric, cliometrics, dominant
design, economic growth, Eurodollar, factory system, Glass-Steagall Act, Habakkuk thesis, Industrial
Revolution, industrialization, institution, mass production, modernization, morbidity, mortality, natural
experiment, new institutionalism, path dependence, path dependency, real bills doctrine, Regulation Q,
Robinson-Patman Act, Schumpeterian growth, shakeout, Smithian growth, Solovian growth, specie,
welfare capitalism.
Contexts: fields
HLM: Statistical software for Hierarchical Linear Modeling, from Scientific Software International.
Contexts: software
Hodrick-Prescott filter: Algorithm for choosing smoothed values for a time series. The H-P filter
chooses smooth values {st} for the series {xt} of T elements (t=1 to T) that solve the following
minimization problem: min { {(x t-st)2 ... etc. } Parameter >0 is the penalty on variation, where
variation is measured by the average squared second difference. A larger value of  makes the resulting
{st} series smoother; less high-frequency noise. The commonly applied value of  is 1600. For the study
of business cycles one uses not the smoothed series, but the jagged series of residuals from it. See
Cooley, 1995, p 27-29. That H-P filtered data shows less fluctuation than first-differenced data, since the
H-P filter pays less attention to high frequency movements. H-P filtered data also shows more serial
correlation than first-differenced data. For =1600: "if the series were stationary, then [this choice]
would eliminate fluctuations at frequencies lower than about thirty-two quarters, or eight years."
Contexts: macro; estimation
hold-up problem: One of a certain class of contracting problems.
Imagine a situation where there is profit to be made if agents A and B work together, so they consider an
agreement to do so after A buys the necessary equipment. The hold-up problem (in this context) is A
might not be willing to take that agreement, even though the outcome would be Pareto efficient, because
after A has made that investment, B would have the power might decide to demand a larger share of the

profits than before, since A is now deeply invested in the project but B is not, so B has some bargaining
power that wasn't there before the investment. B could demand all of the profits, in fact, since A's
alternative is to lose the investment entirely.
Other hold-up problems are analogous to this one.
Contexts: theory of the firm; corporate finance
Holder continuous: An attribute of a function g:Rd->R. g can be said to be Holder continuous if there
exist constants C and 0<=E<=1 such that for all u and v in Rd:
|g(u)-g(v)| <= C||u-v||E
So if g is Holder continuous for C=1 then it is Lipschitz continuous? And if g is Holder continuous then
it is continuous.

Contexts: real analysis;nonparametrics
homoscedastic: An alternate spelling of homoskedastic. McCulloch (1985) argues that the spelling with
the k is preferred, on the basis of the pronunciation and etymology (Greek not French derivation) of the
term.
Source: J. Huston McCulloch. 1985. "On heteros*edasticity" Econometrica 53:2 (March, 1985), p 483.
With thanks to: Shazam web site which cited McCulloch
homoskedastic: An adjective describing a statistical model in which the errors are drawn from the same
distribution for all values of the independent variables. Contrast heteroskedastic.
This is a strong assumption, and includes in particular the assumption in a linear regression, for
example,
y = Xb + e
that the variance of the e's is the same for all X's.
(The observed variance will differ in almost any sample. But if one believes that the data-generating
process does not in principle have greater variances for different values of the independent variable, one
would describe the sample as homoskedastic anyway.)
homothetic: Let u(x) be a function homogeneous of degree one in x. Let g(y) be a function of one
argument that is monotonically increasing in y. Then u(g()) is a homothetic function of y.
So a function is homothetic in y if it can be decomposed into an inner function that is monotonically

increasing in y and an outer function that is homogeneous of degree one in its argument.
In consumer theory there are some useful analytic results that can come from studing homothetic utility
functions of consumption.
Contexts: micro theory.

HRS: Health and Retirement Study, a longitudinal panel of older Americans studied by the Survey
Research Center at the University of Michigan. Their Web site is at http://www.umich.edu/~hrswww.
Contexts: labor
HSB: High School and Beyond, a panel data set on U.S. high school students.
Contexts: data
Huber standard errors: Same as Huber-White standard errors.
Huber-White standard errors: Standard errors which have been adjusted for specified assumed-and-
estimated correlations of error terms across observations.
The implicit citations are to Huber, 1967, White, 1980, and White, 1982.
human capital: The attributes of a person that are productive in some economic context. Often refers to
formal educational attainment, with the implication that education is investment whose returns are in the
form of wage, salary, or other compensation. These are normally measured and conceived of as private
returns to the individual but can also be social returns.
"'Human capital' was invented by the economist Theodore Schultz in 1960 to refer to all those human
capacities, developed by education, that can be used productively -- the capacity to deal in abstractions,
to recognize and adhere to rules, to use language at a high level. Human capital, like other forms of
capital, accumulates over generations; it is a thing that parents 'give' to their children through their
upbringing, and that children then successfully deploy in school, allowing them to bequeath more
human capital to their own children." -- Traub (2000)
Source: Traub, James. The New York Times. January 16, 2000. Sunday, Late Edition, final. Article in
section 6, starting page 52, column 1, Magazine Desk.
With thanks to: Isaac McFarlin for finding this definition
hyperbolic discounting: A way of accounting in a model for the difference in the preferences an agent
has over consumption now versus consumption in the future.
For a and g scalar real parameters greater than zero, under hyperbolic discounting events t periods in the
future are discounted by the factor (1+at)(-g/a).
That expression describes the "class of generalized hyperbolas". This formulation comes from a 1999
working paper of C. Harris and D. Laibson, which cites Ainslie (1992) and Loewenstein and Prelec
(1992).
In dynamic models it is common to use the more convenient assumption that agents have a common
discount rate applying for any t-period forecast, starting now or starting in the future. Hyperbolic
discounting is less convenient but fits the psychological evidence better, and when contrasted to the
constant-discount-rate assumption can get models to fit the noticeable fall in consumption that U.S.
workers are observed to experience when they retire. In a constant-discount-rate model the worker

would usually have forecast the fall in income and their consumption expenses would be smooth.
One reason hyperbolic preferences are less convenient in a model is not only that there are more
parameters but that the agent's decisions are not time-consistent as they are with a constant discount rate.
That is, when planning for time two (two periods ahead) the agent might prepare for what looks like the
optimal consumption path as seen from time zero; but at time two his preferences would be different.
Contrast quasi-hyperbolic discounting.
Source: "Dynamic choices of hyperbolic consumers"", working paper by Christopher Harris and David
Laibson.
Contexts: models; macro; dynamic optimization
hysteresis: a hypothesized property of unemployment rates -- that there is a ratcheting effect, so a short-
term rise in unemployment rates tends to persist.
Theories that would lead to hysteresis:
-- an insider/outsider model of decisionmaking about employment; insiders such as the unionized
workers ratchet up wage rates beyond where it is profitable to hire the unemployed; outsiders who are
unemployed don't get to be part of the negotiation process.
-- behavioral and human capital changes among the unemployed, such as forgetting the details of work
or work behavior, or losing interest or skill in getting new jobs, could lead to declining chances of
becoming employed.
Source: Blank, "Changes in Inequality and unemployment over the 1980s", J Population Economics,
1995 8:1-21 pg 5
Contexts: macro; labor; models
I(0): A stochastic process, say {yt}, is I(0), or "integrated of order zero"l, if it is covariance stationary.
Contrast I(1).
Source: Hamilton
Contexts: time series; stochastic processes
I(1): A stochastic process, say {yt}, is I(1), or "integrated of order zero"l, if it is not covariance
stationary but the series created by taking the first differences of yt's elements (e.g. xt = yt - yt-1) is
covariance stationary.
Source: Hamilton
Contexts: time series; stochastic processes
IARA: increasing absolute risk aversion
IC constraint: IC stands for "incentive compatible".

When solving a principal-agent maximization problem for a contract that meets various criteria, the IC
constraints are those that require agents to prefer to act in accordance with the solution. If the IC
constraint were not imposed, the solution to the problem might be economically meaningless, insofar as
it produced an outcome that met some criterion of optimality but which an agent would choose not to act
in accord with.
See also IR constraint.

Contexts: principal-agent problems; micro theory; models
ICAPM: Intertemporal CAPM. From Merton, 1973.
Source: Campbell, Lo, and MacKinlay 1996, pp 219-221; Merton, 1973

Contexts: finance
ideal: Broda and Weinstein (2005) write: "As explained in Sato (1976), a price index P that is dual to a
quantum index, Q, in the sense that PQ=E and shares and identical weighting formula with Q is defined
as 'ideal'. Fischer (1922) was the first to use the term ideal to characterize a price index. He noted that
the geometric mean of the Paasche and Laspayres indices is ideal."
E there probably stands for expenditure. Quantum probably means quantity. Laspayres is the same as
Laspeyres.
[Ed: I infer that the Paasche and Laspeyres indexes are not themselves ideal.]
Source: Broda and Weinstein. 2005. Globalization and the gains from variety. Aug 2005 working paper.
especially circa p.14;
Diewert, W. Erwin. 1976. Exact and Superlative Index Numbers. Journal of Econometrics. pp. 115-145.
Sato, Kazuo. 1976. The ideal log-change index number. Review of Economics and Statistics. pp. 223-8.
Vartia, Yrjo. 1976. Ideal log-change index numbers. Scandinavian Journal of Statistics. pp. 121-126.
Contexts: demand; estimation
idempotent: A matrix M is idempotent if MM=M. (M times M equals M.)

Example: the identity matrix, denoted I.
identification: A parameter in a model is identified if and only if complete knowledge of the joint
distribution of the observed variables would be enough information to calculate the parameter exactly.
If the model has been written in such a way that its parameters can be consistently estimated from the
observables, then the parameters are identified. There exist cases (mostly obscure) where parameters are
identified but consistent estimators are not possible, as shown in this discussion drawn from the elegant
paper of Gabrielsen (1978).
A model is identified if there is no observationally equivalent model. That is, potentially observable
random variables in the model have different distributions for different values of the parameter.
Formally:
Let h* be a vector of unknown functions and distributions in an econometric model.
Let H denote a set which h* is known to belong. H is defined by the model's restrictions.
Let P(h) denote the joint distribution of observable variables of the model for various elements of h in H.
The distribution for the actual data will be assumed to be P(h *).
Now, vector h* is identified within H if for all h in H such that h<>h* it is true that P(h)<>P(h*).

Note: Linear models are either globally identified or there are an infinite number of observably
equivalent ones. But for models that are nonlinear in parameters, "we can only talk about local
properties." Thus the idea of locally identified models, which can be distinguished in data from any
other 'close by' model.
"An identification problem occurs when a specifed set of assumptions combined with unlimited
observations drawn by a specified sampling process does not reveal a distribution of interest." -- Manski,
Charles F. "Identification problems and decisions under ambiguity: empirical analysis of treatment
response and normative analysis of treatment choice" Northwestern University Department of
Economics and Institute for Policy Research, September 1998, p. 2
Source: The New Palgrave: Econometrics, p 96; and Gabrielsen, 1978

identity matrix: An identity matrix is a square matrix of any dimension whose elements are ones on its
northwest-to-southeast diagonal and zeroes everywhere else. Any square matrix multiplied by the
identity matrix with those dimensions equals itself. One usually says 'the' identity matrix since in most
contexts the dimension is unambiguous. It is standard to denote the identity matrix by I.
idle: Sometimes used to name the state of people who are not in school but also not working. Context is
usually industrialized countries with established labor markets, and the idle are often poor.
Contexts: labor; poverty
IER: An abbreviation for the journal International Economic Review.
Contexts: journals
iff: abbreviation for "if and only if"
Contexts: math
IGARCH: Integrated GARCH, a kind of econometric model of a stochastic process in which there is a
unit root in a GARCH environment.
The IGARCH(p,q) process was proposed in Engle and Bollerslev (1986).
Source: EB86
Contexts: finance
IIA: stands for Irrelevance of Independent Alternatives, an assumption in a model. In a discrete choice
setting, the multinomial logit model is appropriate only if the introduction or removal of a choice has no
effect on the proportion of probability assigned to each of the other choices.
This is a strong assumption; a standard example where IIA is not an appropriate assumption is if one
compares a model of transportation choices between a car and a red bus, then introduces a blue bus. The
blue bus is functionally like the red bus, so presumably its introduction draws ridership more heavily
from the red bus than from the car.
Contexts: models; econometrics

iid: An abbreviation for "independently and identically distributed." One would say this about two or
more random variables to describe their joint distribution. A common use is to describe ongoing
disturbances to a stochastic process, indicating that they are not correlated to one another.
IJIO: An occasional abbreviation for the academic journal International Journal of Industrial
Organization.
Contexts: journals
ILS: Indirect Least Squares, an approach to the estimation of simultaneous equations models. Steps: 1)
Rearrange the structural form equations into reduced form 2) Estimate the reduced form parameters 3)
Solve for the structural form parameters in terms of the reduced form parameters, and substitute in the
estimates of the reduced form parameters to get estimates for the structural ones.
IMF: International Monetary Fund -- an international organization which makes loans to maintain
financial stability. The IMF makes loans to governments not to other institutions [ed.: as far as I know].
The IMF's objectives have to do with minimizing the damage of financial crises, not to have an effect on
economic growth. The IMF has a substantial web site and supports its own research department. See
http://www.imf.org.
Contexts: macro; monetary; trade
implementable: A decision rule (a mapping from expressed preferences by each of a group of agents to
a common decision) "is implementable (in Nash equilibrium) if there exists a game form whose Nash
equilibrium outcome is the desired outcome for the true preferences."
Source: Miyagawa, 1998, p 2

implicit contract: A non-contractual agreement that corresponds to a Nash equilibrium to the repeated
bilateral trading game other than the sequence of Nash equilibria to the one-shot trading game. In the
labor market -- an implicit contract is formally represented by a series of games in which the firm pays a
salary and the employee works effectively because they expect to play the game again (continue the
agreement) if it goes well, not because they have an explicit, enforceable contract. That is, "by implicit
contracts is meant nonbinding commitments from employers to offer ... continuity of wages,
employment, and working conditions, and from employees to forgo such temptations as shirking and
quitting for better opportunities." -- Granovetter, Ch 9
Source: paraphrased from Clive Bull, (1987)

Contexts: labor; game theory; models
impossibility theorem: One of a class of theorems following Arrow (1951) showing that social welfare
functions cannot have certain collections of desirable attributes in common.
Source: Arrow, 1951;

Sen, Amartya. "Rationality and social choice". American Economic Review, Vol 85:1, March 1995,

pages 1-2.
Contexts: public economics; models
impulse response function: Consider a shock to a system. A graph of the response of the system over
time after the shock is an impulse response function graph. One use is in models of monetary systems.
One graphs for example the percentage deviations in output or consumption over time after a one-time
one percent increase in the money stock.
Contexts: macro; econometrics; estimation
Inada conditions: A function f() satisfies the Inada conditions if: f(0) = 0, f'(0) = infinity, and
f'(infinity) = 0. f() is usually a production function in this context.
Source: Blanchard & Fischer, p. 38

inadmissible: A possible action by a player in a game may be said to be inadmissible if it is dominated

by another feasible actions.
The term comes the view of a game as a math problem. An action is or is not admissible as a candidate
solution to the problem of choosing a utility-maximizing strategy for the game player.
As used in Manski, Charles F. "Identification problems and decisions under ambiguity: empirical
analysis of treatment response and normative analysis of treatment choice" Northwestern University
Department of Economics and Institute for Policy Research, September 1998, p. 2
Source: The New Palgrave: Econometrics, p 96; and Gabrielsen, 1978

incidental parameters: Parameters of an estimation problem which only a limited number of data
observations tell us about. This poses a problem for estimating the other parameters, even if every data
observation tells us something about those.
To illustrate, suppose we have a statistical model that we are interested in applying to data which is
clustered in small groups and there is a parameter associated with each small group -- classically, fixed
effects. E.g. we wish to measure the effect of neighborhoods on children's education, but also wish for
each family to have a fixed effect on the educational outcome, and families have ten or fewer members
each. Or we wish to measure worker practices on safety outcomes, and to take into account that each
employer has an effect, but have (for some reason we cannot work around) fewer than twenty
observations on each employer.
Consider the consistency question: if the number of observations were to grow to an infinite number and
there were plenty of variation in the data, would it be possible to estimate the structural parameters
perfectly? A rule of the problem here is that the groups (families or employers, in the examples) are
always small, so when we say infinite data, we mean more and more individuals, but also more and
more families or companies. These groups remain an estimation problem no matter how many
observations there are. Even as our data grows in principle to infinite numbers of obsevations, the
number of parameters to be estimated also grows to an infinite number. In the language of Neyman and
Scott (1948, p. 2) who defined this term, the per-group parameters, which grow infinitely, are the
incidental parameters and the parameters on which every observation sheds light, and which are the
actual subject of interest, are structural parameters. The structural parameters in the examples above are

the effects of various neighborhoods on children, and the effect of various work practices on safety and
health.
In these models, consistent estimation of the incidental parameters is not possible, in their language,
because the data available on each of them is finite. In some cases the structural parameters can be
consistently estimated, and in others cases they cannot. If consistency is possible, the efficiency of
estimation is sometimes impaired, and sometimes not. Maximum likelihood estimation is sometimes
biased or inconsistent (Neyman and Scott, p. 7-8, and p. 26).
Source: Ed Johnson's working paper, "Ordered Logit with Fixed Effects."
Neyman, J., and Elizabeth L. Scott. "Consistent Estimates Based on Partially Consistent Observations"
Econometrica, vol. 16, No. 1 (Jan. 1948), pp 1-32.
JSTOR copy of the article
income elasticity: When used without another referent, appears to mean 'of consumption'. That is for
income I and consumption C:
income elasticity = (I/C)*(dC/dI)
In one paper estimates were shown of .2 to .6 for a random sample of industrialized country middle class
people.
For more details see elasticity.
Source: labor; macro
indemnity: A kind of insurance, in which payment is made (often in previously determined amounts)
for injuries suffered, not for the costs of recovery. The payment is designed not to be a dependent on
anything the patient can control. From the point of view of the insurer, this mechanism avoids the moral
hazard problem of victim spending too much in recovery.
Source: Weisbrod's class circa 5/21/97

Contexts: public
independent: Two random variables X and Y are statistically independent if and only if their joint
density (pdf) is the product of their marginal densities, that is if f(x,y)=f x(x)fy(y).
If two random variables are independent they are also uncorrelated.
Source: Greene, 1993, p. 64

indicator variable: In a regression, a variable that is one if a condition is true, and zero if it is false.
Approximately synonymous with dummy variable, binary variable, or flag.
indifference curve: Represented for example on a graph whose horizontal and vertical axes are
quantities of goods an individual might consume, an indifference curve represents a contour along which
utility for that individual is constant. The curve represents a set of possible consumption bundles
between which the individual is indifferent. Normally, with desirable goods on both axes (say, income
today and income tomorrow) the curve has a certain shape, further from the origin when both quantities

are positive than when one is zero.
Contexts: micro; modelling
indirect utility function: Denoted v(p, m) where p is a vector of prices for goods, and m is a budget in
the same units as the prices. This function takes the value of the maximum utility that can be achieved
by spending the budget m on the consumption goods with prices p.
Source: Varian, 1992, Ch 15

Contexts: models
individually rational: An allocation is individually rational if no agent is worse off in that allocation
than with his endowment.
inductive: Characterizing a reasoning process of generalizing from facts, instances, or examples.

Contrast deductive.
Industrial Revolution: A period commonly dated 1760-1830 in Britain (as in Mokyr, 1993, p 3 and
Ashton, 1948). Characterized by: "a complex of technological advances: the substitution of machines for
human skills and strength; the development of inanimate sources of power (fossil fuels and the steam
engine); the invention, production, and use of new materials (iron for wood, vegetable for animal matter,
mineral for vegetable matter); and the introduction and spread of a new mode of production, known by
contemporaries as the factory system." -- Landes (1993b) p 137.
Source: Mokyr, 1993, p 3; Landes, 1993b, p 137

Contexts: history
industrialization: A historical phase and experience. The overall change in circumstances

accompanying a society's movement population and resources from farm production to manufacturing
production and associated services.
Source: Kemp, Thomas. 1985. Industrialization in Nineteenth-Century Europe. page xi.

Contexts: history
inf: Stands for 'infimum'. A value is an infimum with respect to a set if all elements of the set are at least
as large as that value. An infimum exists in context where a minimum does not, because (say) the set is
open; e.g. the set (0,1) has no minimum but 0 is an infimum.
inf is a mathematical operator that maps from a set to a value that is syntactically like the members of
that set, although the value may not actually be a member of the set.
inflation: Reduction in value of a currency. Measured often by percentage increases in the general price
level per year.

information:
Relevant terms: meet, stopping rule.
Contexts: fields
information matrix: In maximum likelihood estimation, the variance of the score vector. It's a k x k
matrix, where k is the dimension of the vector of parameters being estimated. The vector of parameters
is denoted  here:
I() = var S() = E[(S()-ES())2] = E[S()2]
where the score is S() = dL()/d()
The information matrix can also be calculated by multiplying the Hessian of the log-likelihood function
by (-1).
information number: Synonym for Fisher information (which see).
informational cascade: "An informational cascade occurs when it is optimal for an individual, having
observed the actions of those ahead of him, to follow [that is, imitate] the behavior of the preceding
individual without regard to his own information." -- Bikhchandani, Hirshleifer, and Welch, 1992, p 992
Source: Bikhchandani, Hirshleifer, and Welch, 1992, p 992
INSEAD: An American-style business school near Paris. Operates in English.
INSEE: The economic statistics agency of the French government. Stands for Institut National de la
Statistique et des Etudes Economiques. Its web site.
Contexts: data
inside money: Any debt that is used as money. Is a liability to the issuer. Total amount of inside money
in an economy is zero. Contrast outside money.
institution: There are several definitions. Here's one: "An institution is a social mechanism through
which men work together for common or like ends. It is a necessary arrangement wherever regulated
group behavior over a broad field of activity is found. It is opposed in sociological thought to 'face to
face' grouping and to local community forms of life ..." (Ware, p. 6)
For more see new institutionalism.
Source: Norman J. Ware. Labor in Modern Industrial Society. 1935. D.C Heath and Company.
Contexts: sociology; history; organizations
instrumental variables: Either (1) an estimation technique, often abbreviated IV, or (2) the exogenous

variables used in the estimation technique.

Suppose one has a model:
y = Xb + e
Here y is a T x 1 vector of dependent variables and X is a T x k matrix of independent variables, both of
which come from some data source. b is a k x 1 vector of parameters to estimate, and e is a T x 1 vector
of errors made by the model in its predictions of y.
Suppose in the environment being modelled that the matrix of independent variables X may be
correlated to the e's. One could run OLS, but because of the correlation between X and e, the OLS
estimator is biased and inconsistent. However, using a T x k matrix of independent variables Z,
correlated to the X's but uncorrelated to the e's one can construct an IV estimator that will be consistent:
bIV = (Z'X)-1Z'y
The two stage least squares estimator is an important extension of this idea.
In that discussion above, the exogenous variables Z are called instrumental variables.
With thanks to: Jonathan Meer; Masahito Yoshida

instruments: When regressors are correlated to errors in a model, one may be able to replace the
regressors by estimates for these regressors that are not correlated to the errors. This is the technique of
instrumental variables, and the replacement regressors are called instruments.
The replacement regressors are constructed by running regressions of the original regressors on
exogenous variables that are called the instrumental variables. There are two conditions for a variable to
be a viable instrument. First, it must be uncorrelated with the errors. This is the exogeneity condition.
Second, it must be correlated with the endogenous variables. This is the relevance condition. This
second condition can be tested through the correlation between the instrument and the endogenous
variables (or the coefficient on the instrument in the first stage of a two stage least squares regression).
The exogeneity condition, on the other hand, cannot generally be directly tested, and an intuitive
argument must be made. If there are more instruments than endogenous variables, then an
overidentification test can be used to test exogeneity of the instruments.
Weak instruments which do not satisfy the relevance condition well can often cause more harm than
good. (On this last point, see John Bound, David A. Jaeger and Regina Baker's "The Cure Can Be Worse
than the Disease: A Cautionary Tale Regarding Instrumental Variables," NBER Working Paper T0137.)
integrated: Said in reference to a random process. A random process is said to be 'integrated of order
d' (sometimes denoted I(d)) for some natural number d if the series that would remain after one took first
differences d times would be covariance stationary.
Example: a random walk is I(1).
Example: "Most macroeconomic flows and stocks that relate to population size, such as output or
employment, are I(1)." They are growing.
Example: "An I(2) series [might] be growing at an ever-increasing rate."


intensive margin: Refers to the degree (intensity) to which a resource is utilized or applied. For
example, the effort put in by a worker or the number of hours the worker works. Contrast extensive
margin.
inter alia: "Among other things"
Source: American Heritage Dictionary, 1982

Contexts: phrases
inter vivos: From Latin, "between lives". Used to describe gifts beetween people, usually from one
generation to the next, which are like bequests except that both parties are alive. Quantities and timing
of such gifts are studied empirically in the same way that quantities and purposes of bequests are
subjects of empirical study.
Contexts: labor; family; tax
interim efficient: Defined, apparently, in Holmstrom and Myerson (1983) with reference to Rothschild
and Stiglitz (1976). In Imderst (2000) this term is used to characterize the set ('family') of Rothschild-
Sticlitz contracts in a particular model setting.
Source: Holmstrom, Bengt, and Roger Myerson. "Efficient and durable decision rules with incomplete
information." Econometrica 51 (1983), 1799-1819.
Inderst, Roman. "Markets with simultaneous signaling and screening." Jan 2000 working paper from
University of Mannheim. See http://www.vwl.uni-mannheim.de/modovan/roman.html.
Rothschild, M., and J Stiglitz. "Equilibrium in competitive insurance markets: an essay on the
economics of imperfect information." Quarterly Journal of Economics 90 (1976), 629-650.
interior solution: A choice made by an agent that can be characterized as an optimum located at a
tangency of two curves on a graph.
A classic example is the tangency between a consumer's budget line (characterizing the maximum
amounts of good X and good Y that the consumer can afford) and the highest possible indifference
curve. The slope of that tangency is where:
(marginal utility of X)/(price of X) = (marginal utility of Y)/(price of Y)
Contrast corner solution.
internal knowledge spillover: positive learning or knowledge externalities between programs or plants
within a production organization.
internal labor markets: Refers to the process of reallocating workers within an organization, as
opposed to reallocating them to and from the outside, external labor market. Relevant institutions

include:
- hierarchical job ladders, in which promotions are orderly and routine;
- limited entry points to the organization, e.g. because it hires only for the bottom jobs, or hires only
recent college graduates;
- inducements to stay on the job, such as benefits earned with time like extra vacation or stock options.
(Drawn from Stone, 1973, pp 163-4.)

There are others; to be added here as discovered by this editor. One reason an employer would want to
encourage internal labor markets is that workers learn over time how to work effecively with particular
technologies and in particular organizations and losing this background to an outside employer when a
worker leaves is costly; substitute workers from outside would not know the same things.
Source: Stone, Katherine. 1974. "The Origin of Job Structures in the Steel Industry" Review of Radical
Political Economics. pp 113-173.
Contexts: labor
inverse demand function: A function p(q) that maps from a quantity of output to a price in the market;
one might model the demand a firm faces by positing an inverse demand function and imagining that the
firm chooses a quantity of output.
Contexts: IO; modelling; micro
inverse Mills ratio: Usually denoted (Z), and defined by (Z)=phi(Z)/PHI(Z), where phi() is the
standard normal pdf and PHI() is the standard normal cdf.
invertibility: In context of time series processes, represented for example by a lag polynomial, inverting
means to solve for the e's (epsilons) in terms of the y's.
One inverts moving average (MA) processes to get AR representations.
Source: Watson's compressed time series notes, p. 32

Contexts: econometrics; time series; linear algebra
investment: Any use of resources intended to increase future production output or income.
Contexts: macro
IO: stands for 'Industrial Organization', the field of industry structure, conduct, and performance. By
structure we usually mean the size of the firms in the industry -- e.g. whether firms have monopoly
power.
Relevant terms: absorptive capacity, affine pricing, base point pricing, Bertrand competition, Bertrand
duopoly, Bertrand game, bidding function, capital, circulating capital, Clayton Act, compensating
variation, concentration ratio, cost curve, Cournot duopoly, Cournot game, Cournot model, DOJ,
dominant design, exclusive dealing, firm, FTC, FTC Act, Gini index, Glass-Steagall Act, H index,
Herfindahl-Hirschman index, inverse demand function, Lerner index, linear pricing schedule, Lorenz
curve, market power, market power theory of advertising, Markov strategy, monopoly, monopoly
power, monopsony, network externalities, nonlinear pricing, oligopsony, predatory pricing, price
complements, price substitutes, pricing schedule, product differentiation, Regulation Q, Robinson-
Patman Act, shakeout, Sherman Act, SIC, team production, theory of the firm, tying, X-inefficiency
model.

Contexts: fields
IPO: Stands for "initial public offering", the event of a firm's first sale of stock shares.
Source: finance
IPUMS: Integrated Public Use Microdata Series. These are collections of U.S. Census data, adapted for
easy use by the University of Minnestota Social History Research Laboratory, at its Web site
http://www.ipums.umn.edu.
Contexts: data
IR constraint: IR stands for "individually rational".

When solving a principal-agent maximization problem for a contract that meets various criteria, the IR
constraints are those that require agents to prefer to sign the contract than not to. If the IR constraint
were not imposed, the solution to the problem might be economically meaningless, insofar as it was a
contract that met some criterion of optimality but which an agent would refuse to sign.
See also IC constraint.
Contexts: models; micro theory; principal-agent problems
IRS: The United States national tax collection agency, called the Internal Revenue Service.
is consistent for: means "is a consistent estimator of"
isoquant: Given a production function, an isoquant is "the locus of input combinations that yield the
same output level." (Chiang, p. 360) There is an isoquant set for each possible output level.
Mathematically the isoquant is a level curve of the production function.
Examples and discussion is at Martin Osborne's web page:

http://www.chass.utoronto.ca/~osborne/2x3/tutorial/ISOQUANT.HTM.
Source: Chiang, 1984

Contexts: production theory; micro
Ito process: A stochastic process: a generalized Wiener process with normally distributed jumps.
Contexts: time series; finance; models; statistics
IV: abbrevation for Instrumental Variables, an estimation technique
J statistic: In a GMM context, when there are more moment conditions than parameters to be estimated,
a chi-square test can be used to test the overidentifying restrictions. The test statistic can be called the J
statistic.
In more detail: Say there are q moment conditions and p parameters to be estimated. Let the weighting

matrix be the inverse of the asymptotic covariance matrix. Let T be the sample size. Then T times the
minimized value of the objective function (TJT(T)) is asymptotically distributed with a chi-square
distribution with (q-p) degrees of freedom.
Source: Ogaki, Handbook of Statistics, Vol 11, chapter 17, p 458; Hansen, 1982
jackknife estimator: Has multiple, overlapping definitions numbered below: (1) kind of nonparametric
estimator for a regression function. A jackknife estimator is a linear combination of kernel estimators
with different window widths. Jackknife estimators have higher variance but less bias than kernel
estimators. (Hardle, p. 145.) (2) creates a series of statistics, usually a parameter estimate, from a single
data set by generating that statistic repeatedly on the data set leaving one data value out each time. This
produces a mean estimate of the parameter and a standard deviation of the estimates of the parameter.
(Nick Cox, in an email broadcast to Stata users on statalist, circa 7/5/2000.)

JE: An occasional abbreviation for the academic journal Journal of Econometrics.
Contexts: journals
JEH: An abbreviation for the Journal of Economic History.
Contexts: journals
JEL: Journal of Economic Literature. See also JEL classification codes.
Contexts: journals
JEL classification codes: These define a classification system for books and journal articles relevant to
the economic researcher. The list has three levels of precision: categories A-Z, subcategories like A0-A2
(these are used to classify books), and sub-subcategories like A10-A14 (which are used to classify
journal articles). The second level is detailed here; for the complete set of possible JEL codes see any
issue, e.g. in the Sept 1997 issue, pages 1609-1620. The list below comes from that same issue, pages
1437-1439. A more up-to-date list is online at http://www.aeaweb.org/journal/elclasjn.html
A. General Economics and Teaching (A0 General, A1 General Economics, A2 Teaching of Economics)
B. Methodology and History of Economic Thought (B0 General, B1 History of Economic Thought
through 1925, B2 History of Economic Thought since 1925, B3 History of Thought: Individuals, B4
Economic Methodology)
C. Mathematical and Quantitative Methods (C0 General, C1 Econometric and Statistical Methods:
General, C2 Econometric and Statistical Methods: Single Equation Models, C3 Econometric and
Statistical Methods: Multiple Equation Models, C4 Econometric and Statistical Methods: Special
Topics, C5 Econometric Modeling, C6 Mathematical Methods and Programming, C7 Game Theory and
Bargaining Theory, C8 Data Collection and Data Estimation Methodology; Computer Programs, C9
Design of Experiments)
D. Microeconomics (D0 General, D1 Household Behavior and Family Economics, D2 Production and
Organizations, D3 Distribution, D4 Market Structure and Pricing, D5 General Equilibrium and
Disequilibrium, D6 Economic Welfare, D7 Analysis of Collective Decision-Making, D8 Information
and Uncertainty, D9 Intertemporal Choice and Growth)

E. Macroeconomics and Monetary Economics (E0 General, E1 General Aggregative Models, E2

Consumption, Saving, Production, Employment, and Investment, E3 Prices, Business Fluctuations, and
Cycles, E4 Money and Interest Rates, E5 Monetary Policy, Central Banking and the Supply of Money
and Credit, E6 Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General
Outlook)
F. International Economics (F0 General, F1 Trade, F2 International Factor Movements and International
Business, F3 International Finance, F4 Macroeconomic Aspects of International Trade and Finance) G.
Financial Economics (G0 General, G1 General Financial Markets, G2 Financial and Institutions and
Services, G3 Corporate Finance and Governance) H. Public Economics (H0 General, H1 Structure and
Scope of Government, H2 Taxation and Susidies, H3 Fiscal Policies and Behavior of Economic Agents
Source: JEL XXXV: 3 (Sept 1997), pp 1437-1439

Contexts: journals
JEMS: An abbreviation for the Journal of Economics and Management Strategy.
Contexts: journals
Jensen's inequality: If X is a real-valued random variable with E(|X|) finite and the function g() is
convex, then E[g(X)] >= g(E[X]).
One application: By Jensen's inequality, E[X 2] >= (E[X])2. Since the difference between these is the
variance, we have just shown that any random variable for which E[X 2] is finite has a variance and a
mean.
This is the inequality one can refer to when showing that an investor with a concave utility function
prefers a certain return to the same expected return with uncertainty.
Contexts: probability; statistics; finance
JEP: An abbreviation for the Journal of Economic Perspectives.
Contexts: journals
JET: An abbreviation for the Journal of Economic Theory.
Contexts: journals
JF: Journal of Finance
Contexts: finance; journals
JFE: Journal of Financial Economics
Contexts: finance; journals
JFI: Journal of Financial Intermediation, at http://www.bus.umich.edu/jfi/
JHR: Journal of Human Resources
Contexts: journals

JIE: An abbreviation for the Journal of Industrial Economics .
Contexts: journals
JLE: An abbreviation for the Journal of Law and Economics.
Contexts: journals
JLEO: An abbreviation for the Journal of Law, Economics and Organization.
Contexts: journals
job lock: Describes the situation of a person with a U.S. job who is not free to leave for another job
because the first job has medical benefits associated with it that the person needs, and the second one
would not, perhaps because 'pre-existing conditions' are often not covered under U.S. health insurance.
JOE: The monthly US publication Job Openings for Economists.
Contexts: publications
journals: In the context of research economics these are academic periodicals, usually with peer-
reviewed contents. An amazingly complete list of hyperlinks to journals is at the WebEc web site. Some
are also in this glossary directly, below.
Relevant terms: AER, AJS, ASQ, ASR, BJE, EconLit, Econometrica, EEH, EER, EJ, EMA, GEB, IER,
IJIO, JE, JEH, JEL, JEL classification codes, JEMS, JEP, JET, JF, JFE, JHR, JIE, JLE, JLEO, JPAM,
JPE, JPubE, JRE, Kyklos, QJE, ReStat, ReStud, RJE.
Contexts: fields
JPAM: Journal of Policy Analysis and Management
Contexts: journals
JPE: Abbreviation for the Journal of Political Economy
Contexts: journals
JPubE: Journal of Public Economics
Contexts: journals
JRE: An abbreviation for the Journal of Regulatory Economics.
Contexts: journals
k percent rule: A monetary policy rule of keeping the growth of money at a fixed rate of k percent a
year. This phrase is often used as stated, without specifying the percentage.

k-nearest-neighbor estimator: A kind of nonparametric estimator of a function. Given a data set {X i,

Yi} it estimates values of Y for X's other than those in the sample. The process is to choose the k values
of Xi nearest the X for which one seeks an estimate, and average their Y values. Here k is a parameter to
the estimator. The average could be weighted, e.g. with the closest neighbor having the most impact on
the estimate.

Kalman filter: The Kalman filter is an algorithm for sequentially updating a linear projection for a
dynamic system that is in state-space representation.
Application of the Kalman filter transforms a system of the following two-equation kind into a more
solvable form:
xt+1=Axt+Cwt+1 yt=Gxt+vt in which:
A, C, and G are matrices known as functions of a parameter  about which inference is desired (this is
the PROBLEM to be solved),
t is an whole number, usually indexing time,
xt is a true state variable, hidden from the econometrician,
yt is a measurement of x with scalings G and measurement errors vt,
wt are innovations to the hidden xt process,
Ewt+1wt'=1 by normalization,
Evtvt=R, an unknown matrix, estimation of which is necessary but ancillary to the problem of interest
which is to get an estimate of . The Kalman filter defines two matrices St and Kt such that the system
described above can be transformed into the one below, in which estimation and inference about  and R
is more straightforward, possibly even by OLS:
zt+1=Azt+Kat yt=Gzt+at where zt is defined to be E t-1xt,
at is defined to be yt-Et-1yt,
K is defined to be lim Kt as t goes to infinity.
The definition of those two matrices S t and Kt is itself most of the definition of the Kalman filter:
Kt=AStG'(GStG'+R)-1 St+1=(A-KtG)St(A-KtG)'+CC'+Kt RKt'
Kt is called the Kalman gain.
It's not yet clear to me what specific examples there are of problems that the Kalman filter solves.
Source: Hamilton p 372; Sargent lecture 5/8/97

Contexts: macro; econometrics; estimation
Kalman gain: One of the two equations that characterizes the application of the Kalman filter process
defines an expression sometimes denoted Kt, which is called the Kalman gain.
That equation, using notation from Sargent's lectures, is:

Kt=AStG'(GStG'+R)-1
Contexts: macro; econometrics
keiretsu system: The framework of relationships in postwar Japan's big banks and big firms. Related
companies organized around a big bank (like Mitsui, Mitsubishi, and Sumitomo) which own a lot of
equity in one another and in the bank and do much business with one another. This system has the virtue
of maintaining long term business relationships and stability in suppliers and customers. It has the
disadvantage of reacting slowly to outside events since the players are partly protected from the external
market. (p 412)
Source: Landau, Ralph. 1996. "Strategy for Economic Growth: lessons from the Chemical Industry." In
The Mosaic of Economics Growth, edited by Ralph Landau, Timothy Taylor, and Gavin Wright.
Stanford University Press.
kernel estimation: Kernel estimation means the estimation of a regression function or probability
density function. Such estimators are consistent and asymptotically normal if as the number of
observations n goes to infinity, the bandwidth (window width) h goes to zero, and the product nh goes to
infinity. In practice, kernel estimation may mean use of the Nadaraya-Watson estimator.

kernel function: A weighting function used in nonparametric function estimation. It gives the weights
of the nearby data points in making an estimate. In practice kernel functions are piecewise continuous,
bounded, symmetric around zero, concave at zero, real valued, and for convenience often integrate to
one. They can be probability density functions. Often they have a bounded domain like [-1,1].

Keynes effect: As prices fall, a given nominal amount of money will be a larger real amount.
Consequently the interest rate would fall and investment demanded rise. This Keynes effect disappears in
the liquidity trap. Contrast the Pigou effect. Another phrasing: that a change in interest rates affects
expenditure spending more than it affects savings.
Source: James Tobin. "Keynesian Models of Recession and Depression"

kitchen sink regression: Describes a regression where the regressors are not in the opinion of the writer
thoroughly 'justified' by an argument or a theory. Often used pejoratively; other times describes an
exploratory regression.
KLIC: Kullback-Leibler Information Criterion. An unpublished paper by Kitamura (1997) describes

this as a distance between probability measures. It is defined in that paper thus. The KLIC between

probability measures P and Q is:
I(P||Q) = [integral of] ln(dP/dQ) dP if P << Q

........ = infinity otherwise
Knightian uncertainty: Unmeasurable risk. Contrast Knightian uncertainty.
Source: Used in Rosenberg (1996) in Mosaic of Economic Growth.
knots: If a regression will be run to estimates different linear slopes for different ranges of the
independent variables, it's a spline regression, and the endpoints of the ranges are called knots.
The spline regression is designed so that the resulting spline function, estimating the dependent variable,
is continuous at the knots.

Kolmogorov's Second Law of Large Numbers: If {wt} is a sequence of iid draws from a distribution
and Ewt exists (call it mu) then the average of the w t's goes 'almost surely' to mu as t goes to infinity.
Same as strong law of large numbers, I believe.
Source: Bruce Meyer's D80-3 notes

Kronecker product: This is an operator that takes two matrix arguments. It is denoted by a small circle
with an x in it, but will be denoted here by 'o'. Let A be an M x N matrix, and B be an R x S matrix.
Then AoB is an MR x NS matrix, formed from A by multiplying each element of a by the entire matrix
B and putting it in the place of the element of A, e.g.:
a11 B a12 B ... a1nB
......
......
aM1B aM2B ... aMnB
Kronecker products have the following useful properties:
(AoB)(CoD)=ACoBD
(AoB)-1 = A-1oB-1 (AoB)' = A'oB' (AoB)+(AoC)=Ao(B+C) AoC+BoC = (A+B)oC
Kruskal's theorem: Let X be a set of regressors, y be a vector of dependent variables, and the model
be: y=Xb+e where E[ee'] is the matrix OMEGA. The theorem is that if the column space of (OMEGA)X
is the same as the column space of X; that is, that there is heteroskedasticity but not cross-correlation,
then the GLS estimator of b is the same as the OLS estimator of b.
kurtosis: An attribute of a distribution, describing 'peakedness'. Kurtosis is calculated as E[(x-mu)4]/s4

where mu is the mean and s is the standard deviation.
Source: Hogg and Craig, p 57

Kuznets curve: A graph with measures of increased economic development (presumed to correlate with
time) on the horizontal axis, and measures of income inequality on the vertical axis hypothesized by
Kuznets (1955) to have an inverted-U-shape. That is, Kuznets made the proposition when an economy is
primarily agricultural it has a low level of income inequality, that during early industrialization income
inequality increases over time, then at some critical point it starts to decrease over time. Kuznets (1955)
showed evidence for this.
Source: Kuznets, 1955, p 16-17

Contexts: development; macro
Kyklos: A journal, whose Web site is at http://www.kyklos-review.ch/kyklos/index.html.
Contexts: journals
L1: The set of Lebesgue-integrable real-valued functions on [0,1].
Source: Royden, p 118

Contexts: real analysis; models
L2: A Hilbert space with inner product (x,y) = integral of x(t)y(t) dt.
Equivalently, L2 is the space of real-valued random variables that have variances. This is an infinite
dimensional space.
Source: Royden, p 118

Ln: is the set of continuous bounded functions with domain Rn
Source: Lucas (78) "Asset Pricing" paper

labor: "[L]abor economics is primarily concerned with the behavior of employers and employees in
response to the general incentives of wages, prices, profits, and nonpecuniary aspects of the employment
relationship, such as working conditions."
Relevant terms: active measures, AFQT, AGI, average treatment effect, Beveridge curve, BHPS,
cobweb model, cohort, CPI, education production function, efficiency units, efficiency wage hypothesis,
efficiency wages, Engel effects, Eurosclerosis, experience, extensive margin, family, free entry
condition, frictional unemployment, GDP deflator, Gini index, GSOEP, HRS, hysteresis, idle, implicit
contract, inter vivos, internal labor markets, labor market outcomes, labor-leisure tradeoff, Lerman ratio,
natural rate of unemployment, NLS, NLSY, NLSYW, oligopsony, passive measures (to combat
unemployment), price complements, price substitutes, PSID, regrettables, reservation wage property,
SCF, SES, skill, SLID, social capital, statistical discrimination, structural unemployment, Survey of
Consumer Finances, tenure, tightness, treatment effects, unemployment, union threat model, wage
curve, welfare capitalism, yellow-dog contract.

Contexts: fields
labor market outcomes: Shorthand for worker (never employer) variables that are often considered
endogeneous in a labor regression. Variables which are determined and which may appear on the right
side of such regressions: wage rates, employment indicators, or employment rates.
Contexts: labor
labor productivity: Quantity of output per time spent or numbers employed. Could be measured in, for
example, U.S. dollars per hour.
Contexts: macro
labor theory of value: "Both Ricardo and Marx say that the value of every commodity is (in perfect
equilibrium and perfect competition) proportionaly to the quantity of labor contained in the commodity,
provided this labor is in accordance with the existing standard of efficiency of production (the 'socially
necessary quantity of labor'). Both measure this quantity in hours of work and use the same method in
order to reduce different qualities of work to a single standard." And neither accounts well for monopoly
or imperfect competition. (Schumpeter, p 23)
Source: Schumpeter, Joseph R. 1950. Capitalism, Socialism, and Democracy, third edition. (First edition
1942.) Harper & Row. New York.
labor-augmenting: One of the ways in which an effectiveness variable could be included in a

production function in a Solow model. If effectiveness A is multiplied by labor L but not by capital K,
then we say the effectiveness variable is labor-augmenting.
See also Harrod-neutral, a near-synonym. It is suggested in the literature using the term Harrod-neutral
that some inventions or other technical changes might be measured to be labor-augmenting.

Contexts: macro
labor-leisure tradeoff: In a model of how people spend their time and effort, a classic design is to label
time at work 'labor' and time not at work 'leisure'.
The agents being modeled may make a choice of working more time and earning more money, or
working less and earning less. If they have a desire for both money and leisure, but receive diminishing
returns from each, then there might make an interior choice in the model, to work neither zero nor 24
hours a day. If so the model has succeeded in the sense that it made a prediction which could be tested.
In such a model one might use a utility function to describe the agent's behavior, u(i,e) where i is income
and e is leisure time, and the mathematics of the assumption about diminishing returns take this form:
Let e and i be nonnegative and e be less than 24 hours. u'(i)>0 and u'(e)>0. (Those are first derivatives.)
Also let u''(i)<0 and u''(e)<0. These requirements are not yet enough for there to be an interior solution
but this is the main line path followed by the thinking of an author who makes reference to the labor-
leisure tradeoff.
Contexts: labor

LAD: Stands for 'Least absolute deviations' estimation.
LAD estimation can be used to estimate a smooth conditional median function; that is, an estimator for
the median of the process given the data. Say the data are stationary {xt, yt}. The dependent variable is y
and the independent variable is x.The criterion function to be minimized in LAD estimation for each
observation t is:
q(xt,yt,) = |yt=m(xt,)|
where m() is a guess at the conditional median function.
Under conditions specified in Wooldridge, p 2657, the LAD estimator here is Fisher-consistent for
parameters of the estimator of the median function.
Source: Wooldridge 1995, p 2657

lag operator: Denoted L. Operates on an expression by moving the subscripts on a time series back one
period, so: Let = et-1 Why? Well, it can help manipulability of some expressions. For example it turns
out one can could write an MA(2) process (which see) to look like this, in lag polynomials (which see):
et = (1 + p1L + p2L2)ut and then divide both sides by the lag polynomial, and get a legal, meaningful,
correct expression.
Contexts: macro; time series; models
lag polynomial: A polynomial expression in lag operators (which see). Example: (1 - p1L + p2L2)
where L2 = LL, or the lag operator L applied twice. These are useful for manipulating time series. For
example, one can quickly show an AR(1) is equivalent to an MA(infinity) by dividing both sides by the
lag polynomial (1-pL).
Contexts: models
Lagrangian multiplier: An algebraic term that arises in the context of problems of mathematical
optimization subject to constraints, which in economics contexts is sometimes called a shadow price.
A long example: Suppose x represents a quantity of something that an individual might consume, u(x) is
the utility (satisfaction) gained by that individual from the consumption of quantity x. We could model
the individual's choice of x by supposing that the consumer chooses x to maximize u(x):
x = arg maxx u(x)
Suppose however that the good is not free, so the choice of x must be constrained by the consumer's
income. That leads to a constrained optimization problem ............ [Ed.: this entry is unfinished]
Contexts: micro theory; optimization
laissez faire: A government policy posture of letting market processes proceed without intervention or
regulation. Often implies tolerance of monopoly.

LAN: stands for "locally asymptotically normal", a characteristic of many ("a family of") distributions.
large sample: Usually a synonym for 'asymptotic' rather than a reference to an actual sample
magnitude.
Laspeyres index: A price index following a particular algorithm.
It is calculated from a set ("basket") of fixed quantities of a finite list of goods. We are assumed to know
the prices in two different periods. Let the price index be one in the first period, which is then the base
period. Then the value of the index in the second period is equal to this ratio: the total price of the basket
of goods in period two divided by the total price of exactly the same basket in period one.
As for any price index, if all prices rise the index rises, and if all prices fall the index falls.
Source: http://www.geocities.com/jeab_cu/paper2/paper2.htm.
Contexts: price indices; macro
Law of iterated expectations: Often exemplified by EtEt+1(.) = Et(.) That is, "one cannot use limited
information [at time t] to predict the forecast error one would make if one had superior information [at
t+1]." -- Campbell, Lo, and MacKinlay, p 23.

LBO: Leveraged buy-out. The act of taking a public company private by buying it with revenues from
bonds, and using the revenues of the company to pay off the bonds.
Contexts: finance
least squares learning: The kind of learning that an agent in a model exhibits by adapting to past data
by running least squares on it to estimate a hypothesized parameter and behaving as if that parameter
were correct.
Contexts: macro
leisure: In some models, individuals spend some time working and the rest is lumped into a category
called leisure, the details of which are usually left out.
Contexts: models
lemons model: Describes models like that of Akerlof's 1970 paper, in which the fact that a good is
available suggests that it is of low quality. For example, why are used cars for sale? In many cases
because they are "lemons," that is, they were problematic to their previous owners.
Source: George A Akerlof "The Market for Lemons..." QJE 1970

Contexts: models

Leontief production function: Has the form q=min{x1,x2} where q is a quantity of output and x1 and
x2 are quantities of inputs or functions of the quantities of inputs.
Contexts: models; production
leptokurtic: An adjective describing a distribution with high kurtosis. 'High' means the fourth central
moment is more than three times the second central moment; such a distribution has greater kurtosis
than a normal distribution. This term is used in Bollerslev-Hodrick 1992 to characterize stock price
returns.
Lepto- means 'slim' in Greek and refers to the central part of the distribution.

Lerman ratio: A government benefit to the underemployed will presumably reduce their hours of work.
The ratio of the actual increase in income to the benefit is the Lerman ratio, which is ordinarily between
zero and one. Moffitt (1992) estimates it in regard to the U.S. AFDC program at about .625.
Source: Robert Moffitt, "Incentive Effects of the U.S. Welfare System: A Review", JEL March 1992, p.
17.
Lerner index: A measure of the profitability of a firm that sells a good: (price - marginal cost) / price.
One estimate, from Domowitz, Hubbard, and Petersen (1988) is that the average Lerner index for
manufacturing firms in their data was .37.
Source: Domowitz, Hubbard, and Petersen (1988), p 57-58

Contexts: IO
leverage ratio: Meaning differs by context. Often: the ratio of debts to total assets. Can also be the ratio
of debts (or long-term debts in particular, excluding for example accounts payable) to equity.
Normally used to describe a firm's but could describe the accounts of some other organization, or an
individual, or a collection of organizations.
Contexts: finance; accounting
Leviathan: The all-powerful kind of state that Hobbes thought "was necessary to solve the problem of
social order." -- Cass R. Sunstein, "The Road from Serfdom" The New Republic Oct 20, 1997, p 37.
Contexts: political
likelihood function: In maximum likelihood estimation, the likelihood function (often denoted L()) is
the joint probability function of the sample, given the probability distributions that are assumed for the
errors. That function is constructed by multiplying the pdf of each of the data points together:
L() = L(; X) = f(X; ) = f(X0;)f(X1;)...f(XN;)

Limdep: A program for the econometric study of limited dependent variables. Limdep's web site is at
"http://www.limdep.com".
Contexts: data
limited dependent variable: A dependent variable in a model is limited if it is discrete (can take on
only a countable number of values) or if it is not always observed because it is truncated or censored.
LIML: stands for Limited Information Maximum Likelihood, an estimation idea
Lindahl pricing: A theoretical pricing schedule for a public good which prices the good at a level
which would extract all the consumer surplus from each type of consumer. Consumers with different
levels of demand for the good would each find the good priced just high enough each one is indifferent
to paying for it or not paying for it.
Contexts: public economics; theory
Lindeberg-Levy Central Limit Theorem: Let {wt} be an iid sequence, with mean E[wt]=, and
variance var(wt)=s2.
Let W denote the average of T wt's. Then as T goes to infinity, T .5(W-)/s will converge in distribution
to a standard normal distribution, N(0,1).
Source: Bruce Meyer's D80-3 notes

linear algebra:
Relevant terms: characteristic equation, characteristic root, Cholesky decomposition, conformable,
determinant, eigenvalue, eigenvector, Hessian, idempotent, identity matrix, invertibility, Kronecker
product, symmetric, trace, transpose.
Contexts: fields
linear model: An econometric model is linear if it is expressed in an equation which the parameters
enter linearly, whether or not the data require nonlinear transformations to get to that equation.

linear pricing schedule: Say the number of units, or quantity, paid for is denoted q, and the total paid is
denoted T(q), following the notation of Tirole. A linear pricing schedule is one that can be characterized
by T(q)=pq for some price-per-unit p.

For alternative pricing schedules see nonlinear pricing or affine pricing schedule.

Contexts: IO
linear probability models: Econometric models in which the dependent variable is a probability
between zero and one. These are easier to estimate than probit or logit models but usually have the
problem that some predictions will not be in the range of zero to one.
linear regression: A regression in which dependent variable y could be predicted by a linear function of
the independent variables X, and thus of the form y=Xb+e. Other possible forms of regression might
look like this: y=f(Xb)+e, or y=f(X,b)+e, or y=f(X,b)e.
link function: Defined in the context of the generalized linear model, which see.
Source: Rabe-Hesketh, Sophia, and Brian Everitt. 1999. A Handbook of Statistical Analyses using Stata.
Chapman & Hall / CRC. pp 91-93.
Lipschitz condition: A function g:R->R satisfies a Lipschitz condition if

|g(t1)-g(t2) <= C|t1-t2|
for some constant C. For a fixed C we could say this is "the Lipschitz condition with constant C."
A function that satisfies the Lipschitz condition for a finite C is said to be Lipschitz continuous, which is
a stronger condition than regular continuity; it means that the slope so steep as to be outside the range (-
C, C).
Source: Kolmogorov and Fomin

Contexts: real analysis; nonparametrics
Lipschitz continuous: A function is Lipschitz continuous if it satisfies the Lipschitz condition for a
finite constant C. Lipschitz continuity is a stronger condition than regular continuity. It means that the
slope is never outside the range (-C, C).
Contexts: real analysis; nonparametrics
liquid: A liquid market is one in which it is not difficult or costly to buy or sell.
More formally, Kyle (1985), following Black (1971), describes a liquid market as "one which is almost
infinitely tight, which is not infinitely deep, and which is resilient enough so that prices eventually tend
to their underlying value."

Contexts: finance
liquidity: A property of a good: a good is liquid to the degree it is easily convertible, through trade, into
other commodities. Liquidity is not a property of the commodity itself but something established in

trading arrangements.
Source: Ostroy and Starr, 1990

Contexts: money
liquidity constraint: Many households, e.g. young ones, cannot borrow to consume or invest as much
as they would want, but are constrained to current income by imperfect capital markets.
liquidity trap: A Keynesian idea. When expected returns from investments in securities or real plant
and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and
businesses then continue to hold cash because they expect spending and investment to be low. This is a
self-fulfilling trap.
See also Keynes effect and Pigou effect.
Source: Hughes, Jonathan, and Louis P. Cain. 1994. American Economic History, fourth edition.
HarperCollins College Publishers. p 463.
Contexts: macro
Ljung-Box test: Same as portmanteau test.
Contexts: finance; time series
locally identified: Linear models are either globally identified or there are an infinite number of
observably equivalent ones. But for models that are nonlinear in parameters, "we can only talk about
local properties." Thus the idea of locally identified models, which can be distinguished in data from any
other 'close by' model. "A sufficient condition for local identification is that" a certain Jacobian matrix is
of full column rank.
Source: Hsiao, The New Palgrave: Econometrics, p 96-98

locally nonsatiated: An agent's preferences are locally nonsatiated if they are continuous and strictly
increasing in all goods.
log: In the context of economics, log usually means 'natural log', that is loge, where e is the natural
constant that is approximately 2.718281828. So x=log y <=> ex=y.
log utility: The logarithmic utility function, usually of consumption or wealth. Here is the simplest
version. Define U() as the utility function and w as wealth. Then
U(w) = ln(w)
is the log utility function.

Contexts: modelling; finance
log-concave: A function f(w) is said to be log-concave if its natural log, ln(f(w)) is a concave function;
that is, assuming f is differentiable, f''(w)/f(w) - f'(w)2 <= 0 Since log is a strictly concave function, any
concave function is also log-concave. A random variable is said to be log-concave if its density function
is log-concave. The uniform, normal, beta, exponential, and extreme value distributions have this
property. If pdf f() is log-concave, then so is its cdf F() and 1-F(). The truncated version of a log-
concave function is also log-concave. In practice the intuitive meaning of the assumption that a
distribution is log-concave is that (a) it doesn't have multiple separate maxima (although it could be flat
on top), and (b) the tails of the density function are not "too thick". An equivalent definition, for vector-
valued random variables, is in Heckman and Honore, 1990, p 1127. Random vector X is log-concave iff
its density f() satisfies the condition that f(ax1+(1-a)x2)≥[f(x1) ]a[f(x2)](1-a) for all x1, and x2 in the
support of X and all a satisfying 0≤a≤1.
Source: Heckman and Honore, 1990, p 1127; BMW Ch 2, Job Search Theory
Contexts: statistics; econometrics; models
log-convex: A random variable is said to be log-convex if its density function is log-concave. Pareto
distributions with finite means and variances have this property, and so do gamma densities with a
coefficient of variation greater than one. [Ed.: I do not know the intuitive content of the definition.] A
log-convex random vector is one whose density f() satisfies the condition that f(ax1+(1-a)x2) ≤ [f(x1)]a[f
(x2)](1-a) for all x1, and x2 in the support of X and all a satisfying 0≤a≤1.
Source: Heckman and Honore, 1990, p 1132

Contexts: statistics; econometrics; models
logistic distribution: Has the cdf F(x) = 1/(1+e-x)

This distribution is quicker to calculate than the normal distribution but is very similar. Another
advantage over the normal distribution is that it has a closed form cdf. pdf is f(x) = ex(1+ex)-2 = F(x)F(-
x)
> 
 
Source: Takeshi Amemiya,
The New Palgrave: Econometrics, and Davidson and MacKinnon, 1993, p
515
logit model: A univariate binary model. That is, for dependent variable y i that can be only one or zero,
and a continuous indepdendent variable x i, that:
Pr(yi=1)=F(xi'b)
Here b is a parameter to be estimated, and F is the logistic cdf. The probit model is the same but with a
different cdf for F.
Source: Takeshi Amemiya, "Discrete Choice Models," The New Palgrave: Econometrics
lognormal distribution: Let X be a random variable with a standard normal distribution. Then the

variable Y=eX has a lognormal distribution.

Example: Yearly incomes in the United States are roughly log-normally distributed.
If random variable X is distributed N(m, v), then the random variable Y=eX has a lognormal distribution
with mean em+.5v and variance e2m+v(ev-1). A proof is shown by John Norstad; see sources for that.
Source: A series of proofs relevant to this distribution is at Norstad's finance proofs.

longitudinal data: a synonym for panel data
Contexts: data
Lorenz curve: used to discuss concentration of suppliers (firms) in a market. The horizontal axis is
divided into as many pieces as there are suppliers. Often it is given a percentage scale going from 0 to
100. The firms are in order of decreasing size. On the vertical axis are the market sales in percentage
terms from 0 to 100. The Lorenz curve is a graph of the sales of all the firms to the right of each point on
the horizontal axis.
So (0,0) and (100,100) are the endpoints on the Lorenz curve and it is weakly convex, and piecewise
linear, between. See also Gini coefficient.
Source: Greer, 1992, p. 173

Contexts: IO
loss function: Or, 'criterion function.' A function that is minimized to achieve a desired outcome. Often
econometricians minimize the sum of squared errors in making an estimate of a function or a slope; in
this case the loss function is the sum of squared errors. One might also think of agents in a model as
minimizing some loss function in their actions that are predicated on estimates of things such as future
prices.
Contexts: econometrics; models; estimation
lower hemicontinuous: No appearing points
LRD: Longitudinal Research Database, at the U.S. Bureau of the Census. Used in the study of labor and
productivity. The data is not publicly available without special certification from the Census. The LRD
extends back to 1982.
Contexts: data sets
Lucas critique: A criticism of econometric evaluations of U.S. government policy as they existed in
1973, made by Robert E. Lucas. "Keynesian models consisted of collections of decision rules for
consumption, investment in capital, employment, and portfolio balance. In evaluating alternative policy
rules for the government,.... those private decision rules were assumed to be fixed.... Lucas criticized

such procedures [because optimal] decision rules of private agents are themselves functions of the laws
of motion chosen by the government.... policy evaluation procedures should take into account the
dependence of private decision rules on the government's ... policy rule." In Cochrane's language:
"Lucas argued that policy evaluation must be performed with models specified at the level of
preferences ... and technology [like discount factor beta and permanent consumption c * and exogenous
interest rate r], which presumably are policy invariant, rather than decision rules which are not." [I
believe the canonical example is: what happens if government changes marginal tax rates? Is the
response of tax revenues linear in the change, or is there a Laffer curve to the response? Thus stated, this
is an empirical question.]
Source: Sargent, 1979, Ch 14, p. 398; Cochrane, Econ 330 notes

Contexts: macro; public finance
m-estimators: Estimators that maximize a sample average. The 'm' means 'maximum-likelihood-like'.
(from Newey-McFadden)
The term was introduced by Huber (1967). "The class of M-estimators included the maximum likelihood
estimator, the quasi-maximum likelihood estimator, multivariate nonlinear least squares" and others.
(from Wooldridge, p 2649)
I think all m-estimators have scores.
Source: Newey-McFadden, Handbook of Econometrics, Ch 36, p 2115; Wooldridge, 1995, p 2649

M1: A measure of total money supply. M1 includes only checkable demand deposits.
Contexts: money; macro; data
M2: A measure of total money supply. M2 includes everything in M1 and also savings and other time
deposits.
Contexts: money
MA: Stands for "moving average." Describes a stochastic process (here, et) that can be described by a
weighted sum of a white noise error and the white noise error from previous periods. An MA(1) process
is a first-order one, meaning that only the immediately previous value has a direct effect on the current
value:
et = ut + put-1
where p is a constant (more often denoted ) that has absolute value less than one, and u t is drawn from
a distribution with mean zero and finite variance, often a normal distribution.
An MA(2) would have the form:
et = ut + p1ut-1 + p2ut-2
and so on. In theory a process might be represented by an MA(infinity).
MA(1): A first-order moving average process. See MA for details.

macro:
Relevant terms: accelerator principle, active measures, asset-pricing function, attractor, balance of
payments, balanced growth, basin of attraction, basket, Bellman equation, Beveridge curve, business
cycle frequency, capital, capital consumption, capital deepening, capital-augmenting, catch-up,
CCAPM, central bank, certainty equivalence principle, CES production function, CES utility,
contraction mapping, contractionary fiscal policy, contractionary monetary policy, cost-of-living index,
CPI, current account balance, decision rule, demand deposits, depreciation, disintermediation, Divisia
index, Domar aggregation, dynamic inconsistency, dynamic multipliers, dynamic optimizations,
dynamic programming, economic growth, effective labor, efficiency units, elasticity, embodied,
endogenous growth model, Engel effects, equity premium puzzle, ergodic set, Euler equation,
Eurosclerosis, expectation, FDI, fiat money, fiscalist view, Fisher effect, Fisher equation, Fisher
hypothesis, Fisher Ideal Index, flexible-accelerator model, free entry condition, frictional
unemployment, functional equation, GDP, GDP deflator, generator function, GGH preferences, GMM,
GNP, Golden Rule capital rate, Harrod-neutral, Hicks-neutral, Hicks-neutral technical change, Hodrick-
Prescott filter, hyperbolic discounting, hysteresis, IMF, impulse response function, Inada conditions,
inflation, investment, k percent rule, Kalman filter, Kalman gain, Keynes effect, Kuznets curve, labor
productivity, labor-augmenting, lag operator, Laspeyres index, Law of iterated expectations, least
squares learning, liquidity constraint, liquidity trap, Lucas critique, M1, markup, metaproduction
function, monetarism, monetarist view, monetary base, monetary rule, multi-factor productivity,
NAIRU, natural rate of unemployment, neoclassical growth model, neutrality, New Classical view, new
growth theory, NNP, nondivisibility of labor, numeraire, passive measures (to combat unemployment),
Phillips curve, physical depreciation, Pigou effect, price index, pricing kernel, productivity, productivity
paradox, property income, putty-putty, Q ratio, quasi-hyperbolic discounting, Ramsey equilibrium,
Ramsey outcome, rational expectations, RBC, real business cycle theory, recession, reservation wage
property, Ricardian proposition, risk free rate puzzle, RMPY, saddle point, Schumpeterian growth, sink,
Smithian growth, Solovian growth, Solow growth model, Solow residual, source, stabilization policy,
stable steady state, state price vector, state-space approach to linearization, stochastic difference
equation, Stolper-Samuelson theorem, structural unemployment, substitution bias, superneutrality,
technical change, technology shocks, tertiary sector, TFP, time consistency, time deposits, Tobin's
marginal q, total factor productivity, trajectory, transient, transversality condition, unemployment, value
function, VARs, vintage model, Walrasian model, welfare capitalism, Wold's theorem.
Contexts: fields
main effect: As contrasted to interaction effect.
In the regression
yi = aXi + bXZi + cZi + errors
The bXZi term measures the interaction effect. The main effect is cZi.
This term is usually used in an ANOVA context, where its meaning is presumably analogous but this
editor has not verified that.
Source: Phrasing example drawn from

Hamermesh, Daniel S. "The Art of Labormetrics." NBER Working paper 6927. February 1999.
http://www.nber.org/papers/w6927

maintained hypothesis: An ambiguous term. Probably it is wise to avoid it.
Most common meaning: synonym for alternative hypothesis. "The model in which the restrictions do not
hold is usually called the alternative hypothesis, or sometimes the maintained hypothesis, and may be
denoted H1." (Davidson and MacKinnon, 1993, p. 78). However Greene, 1993/7, third edition, defines it
to mean precisely the opposite. From p. 155: "The formal procedure involves a statement of the
hypothesis, usually in terms of a 'null' or maintained hypothesis and an 'alternative,' conventionally
denoted H0 and H1, respectively."
Source: Davidson and MacKinnon, 1993, p 78-79.
Greene, 1993, 3rd edition, p 155.

Malmquist index: An index number enabling a productivity comparison between economy A and
economy B. Imagine that we have an aggregate production function QAA=fA(KA,LA) that describes
economy A and an aggregate production Q BB =fB(KB,LB) that describes economy B. K and L stand for
capital and labor inputs. We substitute the inputs of B into the production function of A to compute
QAB=fA(KB,LB). We also compute QBA=fB(KA,LA) with the inputs from country A.
The Malmquist index of A with respect to B is the geometric mean of QAA/QAB and QBA/QBB . It will
be greater than one if A's aggregate production technology is better than B's.
Source: Hulten, 2000, pp 26-27.

MANOVA: This is a generalization of the ANOVA statistical model. It allows multiple dependent
variables. Output is reported as one or more multivariate test statistics which are asymptotically
equivalent but differ in their small sample properties. These tests include Wilks's lambda, Pillai's trace,
Lawley-Hotelling trace, and Roy's largest root. If the test statistics are significantly different from zero,
the hypothesis that there is no difference between the multidimensional mean vectors of the categories is
rejected.
Source: Stata manuals

Contexts: statistics; sociology
mantissa: Fractional part of a real number.
MAR: a rare abbreviation, for moving-average representation
March CPS: Also known as the Annual Demographic File. Conducted in March of each year by the
Census Bureau in the U.S. Gets the information from the regular monthly CPS survey, plus additional
data on work experience, income, noncash benefits, and migration.

Source: Blanchflower and Oswald, Ch 4, p. 171

Contexts: data
marginal significance level: a synonym for 'P value'

market: An organized exchange between buyers and sellers of a good or service.
Contexts: models
market capitalization: Total number of shares times the market price of each. May be said of a firm's
shares, or of all the shares on an equity market.
Contexts: finance
market failure: A situation, usually discussed in a model not in the real world, in which the behavior of
optimizing agents in a market would not produce a Pareto optimal allocation. Sources of market failures:
-- monopoly. Monopoly or oligopoly producers have incentives to underproduce and to price above
marginal cost, which then gives consumers incentives to buy less than the Pareto optimal allocation.
-- externalities
Source: Layard and Glaister, 1972, p 15

Contexts: general equilibrium; public
market for corporate control: Shares of public firms are traded, and in large enough blocks this means
control over corporations is traded. That puts some pressure on managers to perform, otherwise their
corporation can be taken over.
Source: Jensen and Ruback, 1983

Contexts: corporate finance
market power: Power held by a firm over price, and the power to subdue competitors.
Contexts: IO
market power theory of advertising: That established firms use advertising as a barrier to entry
through product differentiation. Such a firm's use of advertising differentiates its brand from other
brands to a degree that consumers see its brand is a slightly different product, not perfectly substituted
by existing or potential competitors. This makes it hard for new competitors to gain consumer
acceptance.
Contexts: IO
market price of risk: Synonym for Sharpe ratio.
Contexts: finance
Markov chain: A stochastic process is a Markov chain if:

(1) time is discrete, meaning that the time index t has a finite or countably infinite number of values;

(2) the set of possible values of the process at each time is finite or countably infinite; and
(3) it has the Markov property of memorylessness.
Source: Hoel, Port, and Stone, 1987, pg v and pg 1

Markov perfect: A characteristic of some Nash equilibria. "A Markov perfect equilibrium (MPE) is a
profile of Markov strategies that yields a Nash equilibrium in every proper subgame." A Markov
strategy is one that does not depend at all on variables that are functions of the history of the game
except those that affect payoffs.
A tiny change to payoffs can discontinuously change the set of Markov perfect equilibria, because a
state variable with a tiny effect on payoffs can be part of a Markov perfect strategy, but if its effect drops
to zero, it cannot be included in a strategy; that is, such a change makes many strategies disappear from
the set of Markov perfect strategies.
Source: Fudenberg and Tirole, 1991/1993, p 501-2; originally defined in Maskin, E., and J. Tirole
(1988), "A Theory of Dynamic Oligopoly: I & II," Econometrica 56:3, 549-600.
Markov process: A stochastic process where all the values are drawn from a discrete set. In a first-order
Markov process only the most recent draw affects the distribution of the next one; all such processes can
be represented by a Markov transition density matrix. That is,
Pr{xt+1 is in A | xt, xt-1,...} = Pr{xt+1 is in A | xt}
Example 1: xt+1 = a + bxt + et is a Markov process
For a=0, b=1 it is a martingale.
A Markov process can be periodic only if it is of higher than first order.
Contexts: models; statistics
Markov property: A property that a set of stochastic processes may have. The system has the Markov
property if the present state predicts future states as well as the whole history of past and present states
does -- that is, the process is memoryless.
Source: Hoel, Port, and Stone, 1987, pg v and pg 1

Markov strategy: In a game, a Markov strategy is one that does not depend at all on state variables that
are functions of the history of the game except those that affect payoffs.
[Ed.: I believe random elements can be in a Markov strategy: e.g. a mixed strategy could be a Markov
strategy.]
Source: Tirole, 1988/1993, p 343; Fudenberg and Tirole, 1991/1993, p 502

Markov transition matrix: A square matrix describing the probabilities of moving from one state to
another in a dynamic system. In each ?row? are the probabilities of moving from the state represented by
that row, to the other states. Thus the rows of a Markov transition matrix each add to one. Sometimes

such a matrix is denoted something like Q(x' | x) which can be understood this way: that Q is a matrix, x
is the existing state, x' is a possible future state, and for any x and x' in the model, the probability of
going to x' given that the existing state is x, are in Q. (An example would be good here)
Contexts: models
Markov's inequality: Quoting almost strictly from Goldberger, 1994, p 31:
If Y is a nonnegative random variable, that is, if Pr(Y<0)=0, and k is any positive constant, then E(Y) ≥
kPr(Y ≥ k).
The proof is amazingly quick. See Goldberger page 31 or Hogg and Craig page 68.
Source: goldberger, hogg and craig

markup: In macro, the ratio of price to marginal cost. Can be used as a measure of market power across
firms, industries, or economies.
Marshallian demand function: x(p,m) -- the amount of a factor of production that is demanded by a
producer given that it costs p per unit and the budget limit that can be spent on all factors is m. p and x
can be vectors.

Contexts: production theory; micro
martingale: Same as martingale difference sequence.
martingale difference sequence: ** This definition is not usable as is ** A stochastic process {X t} is a

martingale (or, equivalently, martingale difference sequence) with respect to information {Y t} if and
only if:
(i) E|Xt| < infinity
(ii) E[Xn+1 | Y0, Y1, ... , Yn] = Xn E(gt+1) = gt.
Martingale differences are uncorrelated but not necessarily independent.
mass production: "A production system characterized by mechanization, high wages, low prices, and
large-volume output." (Hounshell, p.305) Usually refers to factory processes on metalwork, not to
textiles or agriculture. The term came into use in the 1920s and referred to production approaches
analogous to those of the Ford Motor Company in the US.
Source: Hounshell, David. 1984. From the American System to Mass Production, 1800-1932. Johns
Hopkins University Press. p. 305.

Contexts: history
Matching Pennies: A zero-sum game with two players. Each shows either heads or tails from a coin. If
both are heads or both are tails then player One wins, otherwise Two wins. The payoff matrix is at right.
Player Two
There is no Nash equilibrium to this game in pure strategies.
C D
Source: Varian, 1992, Ch 15 C 1,-1 -1,1

Player One
Contexts: game theory D -1,1 1,-1
Matlab: A matrix programming language and programming environment. Used more by engineers but
increasingly by economists. There's a very brief tutorial at Tutorial: Matlab.
The software is made by The Mathworks, Inc.
Contexts: data; code
maximand: In a maximization problem, the maximand is the function to be maximized. In the problem
being referred to, the operation is the select some parameters or choices so as to get the highest feasible
value from this maximand.
Contexts: optimization
maximin principle: A justice criterion proposed by the philosopher Rawls. A principle about the just
design of social systems -- e.g., rights and duties. According to this principle the system should be
designed to maximize the position of those who will be worst off in it.
"The basic structure is just throughout when the advantages of the more fortunate promote the well-
being of the least fortunte, that is, when a decrease in their advantages would make the least fortunate
even worse off than they are. The basic structure is perfectly just when the prospects ofthe least
fortunate are as great as they can be." -- Rawls, 1973, p 328
Source: Rawls, 1973, p 328

Contexts: public
maximum score estimator: A nonparametric estimator of certain coefficients of a binary choice model.
Avoids assumptions about the distribution of errors that would be made by a probit or logit model in the
same circumstances.
In the econometric model: the dependent variable yi is either zero or one; the regressors X i are
multiplied by a parameter vector . yi often represents which of two choices was selected by a
respondent.  is estimated to maximize an objective function that is given by an expression: max
sumi=1 to N [(yi-.5)sign(Xi)]
where i indexes observations, of which there are N, and the function sign() has value one if its argument
is greater than or equal to zero, and has value zero otherwise.
 chosen this way has the property that it maximizes the correct prediction of y i given the information in
X. Notice that although the maximum value of the maximand may be well defined,  is not usually
uniquely estimated in a finite data set, because values of  near betahat would make the same

predictions. Often, however,  is estimated within a narrow range.
Source: Greene, 1993, p 658; Greene, 1997, p 902; Manski, 1975

Contexts: econometrics; discrete choice models; estimation
MBO: Stands for Management Buy-Out, the purchase of a company by its management. Sometimes
means Management By Objectives, a goal-oriented personnel evaluation approach.
Contexts: finance
mean square error: A criterion for an estimator: the choice is the one that minimizes the sum of
squared errors due to bias and due to variance.
Source: Kennedy, 1992, p. 16

mean squared error: The mean squared error of an estimator b of true parameter vector B is:
MSE(b) = E[(b - B)2]
which is also
MSE(b) = var(b) + (bias(b))(bias(b)')

measurable: If (S, A) is a measurable space, elements of A are A-measurable.
measurable space: (S, A) is a measurable space if S is a set and A is a sigma-algebra of S. Elements of

A are said to be A-measurable.
measure: A noun, in the mathematical language of measure theory: a measure is a function from sets to
the real line. Probability is a common kind of measure in economic models. Other measures are the
counting measure, which is the number of elements in the set, the length measure, the area measure, and
the volume measure. Length, area, and volume are defined along lines, planes, and spaces just as one
would expect, and they have the natural meanings.
Formally: a measure is a mapping m from a sigma algebra A to the extended real line such that
(i) m(null) = 0
(ii) m(B) >= 0 for all B in A
(iii) m(any countable union of disjoint sets in A) = the sum of m(each of those sets)
The third property is called the countable additivity property. An example: imagine probability mass
distributed evenly on a unit square. Probability is then defined on any area within the square. The
measure (probability, here) is the size (area) of the subset.
The kinds of subsets on which measures such as probability are defined are called sigma-algebras
(which see).

measure theory:
Relevant terms: B1, Borel set, Borel sigma-algebra, countable additivity property, measurable,
measurable space, measure, sigma-algebra.
Contexts: fields
measurement error: The data used in an econometric problem may have been measured with some
error, and if so this violates a basic condition of the abstract environment in which OLS is validly
derived. This turns out not to be seriously problematic if the dependent variable is affected by an iid
mean-zero measurement error, but if the regressors have been measured with a mean-zero iid error the
estimates can be biased. There are standard approaches to this problem, notably the use of instrumental
variables. Paraphrasing from Schennach, 2000, p 1: In a linear econometric specification, a
measurement error on the regressors can be viewed as a particular type of endogeneity problem causing
the disturbance to be correlated with the regressors, which is precisely the problem addressed by
standard IV techniques.
Source: Schennach, Susanne M. "Estimation of nonlinear models with measurement error." MIT
Department of Economics working paper, dated Jan 14, 2000.
mechanism design: A certain class of principal-agent problems are called mechanism design problems.
In these, a principal would like to condition her own actions on the private information of agents. The
principal must offer incentives for the agents to reveal information.
Examples from the theoretical literature are auction design, monopolistic price discrimination, and
optimal taxation. In an auction the seller would like to set a price just below the highest valuation of a
potential buyer, but does not know that price, and an auction is a mechanism to at least partially reveal
it. In a price discrimination, the seller would like to offer the product at different prices to groups with
different valuations but may not be able to identify which group an agent is a member of in advance.
Source: Fudenberg and Tirole, 1993, p 243

medium of exchange: A distinguishing characteristic of money is that it is taken as a medium of

exchange, that is, in the language of Wicksell (1935) p. 17, that it is "habitually, and without hesitation,
taken by anybody in exchange for any commodity."
Source: Bennett T. McCallum, "Comments on 'A Model of Commodity Money' by Thomas J. Sargent
and Neil Wallace", Journal of Monetary Economics 12, July 1983, pp. 189-196.
Contexts: money
meet: Given a space of possible events, the meet is the finest common coarsening of the information
sets of all the players. The meet is the finest partition of the space of possible events such that all players
have beliefs about the probabilities of the elements of the partition.
Contexts: micro theory; information
mesokurtic: An adjective describing a distribution with kurtosis of 3, like the normal distribution. See
by contrast leptokurtic and platykurtic.


metaproduction function: Means best-practice production function -- depending on context, either the
most efficient feasible practice, or most efficient actual practice of the existing entities converting inputs
X into output y. Often in practice y is an agricultural output, and data from a sample of farms, and the
meta-production function could be estimated by estimating production functions for the farms and
choosing among the most efficient ones. In the (macro) context of the quote below, the entities are not
farms but countries, producing GDP. "The term 'meta-production function' is due to Hayami and Ruttan
(1970, 1985). For an exposition of the meta-production function approach, see Lau and Yotopoulos
(1989) and Boskin and Lau (1990).... The two most important maintained hypotheses [of this approach]
are: (1) that the aggregate production functions of all countries are identical in terms of 'efficiency-
equivalent' units of output and inputs; and (2) that technical progress in all countries can be represented
in the commodity-augmentation form, with constant geometric augmentation factors...." The framework
allows "the researcher to consider and potentially to reject the maintained hypotheses of traditional
growth accounting [such as] (1) constant returns to scale, (2) neutrality of technical progress; and (3)
profit maximization." (p66) An assumption related to the second maintained hypothesis above, which
the theory depends on (p69) is that "the measured outputs and inputs of the different countries may be
converted into unobservable standardized, or 'efficiency-equivalent,' quantities of output and inputs by
multiplicative country- and output- and input-specific time-varying augmentation factors...." (where
"time-varying" seems to conflict with the requirement, above, that the augmentation factors be
"constant".) (p69) In this approach "countries may differ in the quantities of their factor inputs and
intensities and possibly in the qualities and efficiencies of their inputs and outputs, but they do not differ
with regard to the technological opportunities .... [T]hey are assumed to have equal access to
technologies." From p66, 69, 73 of Lau (1996).
Source: Lau, Lawrence J. 1996. "The Sources of Long-Term Economic Growth: Observations from the
Experience of Developed and Developing Countries." In Mosaic of Economic Growth, edited by Ralph
Landau, Timothy Taylor, and Gavin Wright. Stanford University Press.
With thanks to: Randal Kinoshita
Contexts: international; macro; agricultural
metatheorem: An informal term for a proposition that can be proved in a class of economic model
environments.
Contexts: models
method of moments: A way of generating estimators: set the distribution moments equal to the sample
moments, and solve the resulting equations for the parameters of the distribution.
MFP: Abbreviation for Multi-factor productivty.
MGF: stands for 'moment generating function', which see.
Minitab: Data analysis software, discussed at http://www.minitab.com.
mixing: In the context of stochastic processes, events A and B (that is, subsets of possible outcomes of

the process) "are mixing" if they are asymptotically independent in the following way.
Let L be a lag operator that moves all time subscripts back by one (e.g. replacing t by t-1). Iff A and B
are mixing, then taking the limit as h goes to infinity:
lim Pr(A intersected with LhB) = Pr(A)Pr(B).
The event Lh is the event B, but h periods ago; it's NOT some kind of stochastic ancestor of B.
If two events are independent, they are mixing.

If two events are mixing, they are ergodic.
I *believe* that a stochastic process is mixing iff all pairs of possible values it can take, taken as events,
are mixing.
Contexts: probability; econometrics; time series
MLE: maximum likelihood estimator
MLRP: Abbreviation for monotone likelihood ratio property of a statistical distribution.
models: Generally means theoretical or structural models. Can also mean econometric models which in
this glossary are listed separately.
Relevant terms: annihilator operator, APT, asset-pricing function, attractor, barter economy, basin of
attraction, Bellman equation, budget set, CAPM, CARA utility, cash-in-advance constraint, certainty
equivalence principle, CES production function, CES technology, CES utility, CGE, Cobb-Douglas
production function, cobweb model, coefficient of absolute risk aversion, coefficient of relative risk
aversion, complete market, conditional factor demands, constant returns to scale, consumption set,
contract curve, contraction mapping, control variable, core, cost function, costate, Cournot duopoly,
CRRA, decision rule, demand set, dictator game, discount factor, discount rate, double coincidence of
wants, dynamic optimizations, dynamic programming, economic environment, efficiency wage
hypothesis, efficiency wages, endowment, Engel curve, equilibrium, Euler equation, ex ante, ex post,
First Welfare Theorem, Fisherian criterion, functional equation, future-oriented, game, GARP, Gaussian
white noise process, generalized Wiener process, GGH preferences, Gorman form, Hahn problem,
Hicks-neutral technical change, hyperbolic discounting, hysteresis, IC constraint, IIA, implicit contract,
impossibility theorem, Inada conditions, indirect utility function, individually rational, inside money, IR
constraint, Ito process, Keynes effect, L, L, L, lag operator, lag polynomial, Law of iterated
expectations, leisure, lemons model, Leontief production function, locally nonsatiated, log-concave, log-
convex, loss function, lower hemicontinuous, market, Markov process, Markov transition matrix,
markup, maximum score estimator, metatheorem, Modigliani-Miller theorem, monetized economy,
money, money-in-the-utility-function models, Nash product, NBS, NE, netput, neutrality, numeraire,
offer curve, OLG, outside money, parametric, Pareto optimal, Pareto set, payoff matrix, phase portrait,
Pigou effect, PO, Poisson process, precautionary savings, present-oriented, principle of optimality,
production set, putty-putty, Q ratio, quasi-hyperbolic discounting, quasilinear, random process, random
walk, RBC, real business cycle theory, Ricardian proposition, risk, saddle point, Schwarz Criterion,
Second Welfare Theorem, sharing rule, Shubik model, single-crossing property, sink, social planner,
social welfare function, source, SPE, SPO, stable steady state, staggered contracting, state price, state
price vector, state-space approach to linearization, stochastic difference equation, stochastic process,

strict version of Jensen's inequality, strongly Pareto Optimal, subdifferential, subgame perfect
equilibrium, superneutrality, technology shocks, total factor productivity, Townsend inefficiency,
trajectory, transversality condition, uncertainty, upper hemicontinuous, utility curve, value function,
WACM, Walrasian auctioneer, Walrasian equilibrium, WAPM, WE, weakly Pareto Optimal, white
noise process, WPO.
Contexts: fields
modernization: Quoting from Landes: "Modernization comprises such developments as urbanization

(the concentration of the population in cities that serve as nodes of industrial production, administration,
and intellectual and artistic activity); a sharp reduction in both death rates and birth rates from traditional
levels (the so-called demographic transition); the establishment of an effective, fairly centralized
bureaucratic government; the creation of an educational system capable of training and socializing the
children of the society to a level compatible with their capacities and best contemporary knowledge;
and, of course, the acquisition of the ability and means to use an up-to-date technology."
Source: Landes, 1969/1993, p 6

Contexts: history
Modigliani-Miller theorem: that the total value of the bonds and equities issued by a firm in a model is
independent of the number of bonds outstanding or their interest rate.
The theorem was shown by Modigliani and Miller, 1958 in a particular context with no fixed costs,
transactions costs, asymmetric information, and so forth. Analogous theorems are shown in various
contexts. The assumptions made by such theorems offer a way of organizing what it would be that
makes corporations choose to offer various levels of bonds. The choice of numbers and types of bonds
and stocks a corporation offers is the choice of capital structure. Among the factors affecting the capital
structure of a firm are taxes, bankruptcy costs, agency costs, signalling, bargaining position in litigation,
and differences between firms and investors in access to capital markets.
Source: Sargent, 1987, Ch 3; Modigliani and Miller, 1958

moment-generating function: Denoted M(t) or M X(t), and describes a probability distribution. A

moment-generating function is defined for any random variable X with a pdf f(x). M(t) is defined to be
E[etX], which is the integral from minus infinity to infinity of e tXf(x). A use for these is that the tth
moment of X is M(t)(0), that is the tth derivative of M() at zero.
monetarism: The view that monetary policy is a prime source of the business cycle, and that the time
path of the money stock is a good index of monetary policy. As presented by Milton Friedman and Anna
Schwartz, monetarism emphasizes the relation between the level of the money stock and the level of
output without a detailed theory of why changes in the money stock are not neutral in the short run.
Later versions posed an explicit basis for noneutrality in the form of barriers to information flow about
prices.
In policy terms monetarists, notably Friedman, advocated a monetary rule, that is, a steady growth in the
money supply to match economic growth, without allowing central banks room for discretion. If the rule
is credible, public expectations of inflation be low, and thus inflation itself, if high, would fall almost

immediately.
Source: Sims, "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered"
Contexts: macro; money; policy
monetarist view: In extreme form: that only the quantity of money matters by way of aggregate demand
policy. Relevant only in an overheated economy (Branson p 391).
Source: Branson
monetary base: In a modern industrialized monetary economy, the monetary base is made up of (1) the
currency held by individuals and firms and (2) bank reserves kept within a bank or on deposit at the
central bank.
monetary regime: "A monetary regime can be thought of as a set of rules governing the objectives and
the actions of the monetary authority."
Examples: (1) "A gold standard is one example of a monetary regime -- the monetary authority is
obligated to maintain instant convertibility between its liabilities and the gold. Th monetary authority
may have considerable room to maneuver in that monetary regime, but it can do nothing that would
cause it to violate its commitment."
(2) "The same remarks would apply to a monetary regime obligating the monetary authority to maintain
a fixed exchange rate between its own and another currency." (3) "A monetary regime of a very different
sort could be based on a Monetarist rule specifying the rate of growth of some monetary aggregate. The
basic distinction is between regimes based on a convertibility or redemption principle and those based
on a quantity principle."
Source: Glasner, p 206

Contexts: money
monetary rule: See the policy discussion in monetarism.
monetized economy: A model economy that has a medium of exchange: money
Source: Bennett T. McCallum, "Comments on 'A Model of Commodity Money' by Thomas J. Sargent
and Neil Wallace", Journal of Monetary Economics 12, July 1983, pp. 189-196.
money: A good that acts as a medium of exchange in transactions. Classically it is said that money acts
as a unit of account, a store of value, and a medium of exchange. Most authors find that the first two are
nonessential properties that follow from the third. In fact, other goods are often better than money at
being intertemporal stores of value, since most monies degrade in value over time through inflation or
the overthrow of governments.
Theory: Ostroy and Starr, 1990, p. 25, define money in certain models "as a commodity of positive price
and zero transaction cost that does not directly enter in production or consumption."

History: See this Web site on the History of Money.
Related terms:
Relevant terms: bank note, barter economy, bill of exchange, bimetallism, Bretton Woods system,
capital ratio, cash-in-advance constraint, central bank, demand deposits, double coincidence of wants,
dynamic inconsistency, EMS, Eurodollar, Fed Funds Rate, fiat money, Fisher effect, Fisher equation,
Fisher hypothesis, free reserves, Friedman rule, fungible, Gresham's Law, Hahn problem, high-powered
money, inflation, inside money, k percent rule, liquidity, liquidity constraint, M1, M2, medium of
exchange, monetarism, monetarist view, monetary base, monetary regime, monetary rule, monetized
economy, money, money illusion, money-in-the-utility-function models, neutrality, outside money,
seignorage, Shubik model, specie, speculative demand, storable, superneutrality, time deposits,
Townsend inefficiency, transactions demand.
money illusion: "the belief that money [that is, a particular currency] represents a constant value"
Source: Hayek, 1978, Ch 3

Contexts: money
money-in-the-utility-function models: A modeling idea. In a basic Arrow-Debreu general equilibrium

there is no need for money because exchanges are automatic, through a 'Walrasian auctioneer'. To study
monetary phenomena, a class of models was made in which money was a good that brought direct utility
to the agent holding it; e.g., a utility function took the form u(x,m) where x is a vector of other
commodities, and m is a scalar quantity of real money held by the agent. Using this mechanism money
can have a positive price in equilibrium and monetary effects can be seen in such models. Contrast
'cash-in-advance constraint' for an alternative approach.
Source: Ostroy and Starr, 1990, pp 6-7

monopoly: If a certain firm is the only one that can produce a certain good, it has a monopoly in the
market for that good.
Contexts: IO
monopoly power: The degree of power held by the seller to set the price for a good. In U.S. antitrust
law monopoly power is not measured by market share. (Salon magazine, 1998/11/11)
Contexts: IO
monopsony: A state in which demand comes from one source. If there is only one customer for a
certain good, that customer has a monopsony in the market for that good. Analogous to monopoly, but
on the demand side not the supply side. A common theoretical implication is that the price of the good is
pushed down near the cost of production. The price is not predicted to go to zero because if it went
below where the suppliers are willing to produce, they won't produce. Market power is a continuum
from perfectly competitive to monopsony and there's an extensive practice/industry/science of measuring
the degree of market power.
Examples: For workers in an isolated company town, created by and dominated by one employer, that

employer is a monopsonist for some kinds of employment. For some kinds of U.S. medical care, the
government program Medicare is a monopsony.
Contexts: IO
monotone likelihood ratio property: A property of a set of pdfs which is assumed in theoretical
models to characterize risk and uncertainty because it makes more conclusions feasible and is often
plausible.
Example: Let e ("effort") be an input variable into a stochastic production function, and y be the random
variable that represent output. Let f(y | e) be the pdf of y for each e. Then the statement that f() has the
monotone likelihood ratio property (MLRP) is the same as the statement that:
for e2>e1, f(y|e2)/f(y|e1) is increasing in y.
This says that output is positively related to effort, and something stronger, something like: of two
outcomes or ranges of outcomes, the worse one will not become relatively more likely than the better
one if effort were to rise. By relatively more likely is meant that the likelihood ratio, above, rises.
The set of pdfs for which the MLRP is assumed above is the set of f()'s indexed by values of e. Each
holds that specified relationship to the others. In practice the MLRP assumption tends to rule out
multimodal classes of distributions, and this is its main effect. (By multimodal we mean those with
multiple-peaked pdfs.)
Normally e is scalar, taking on either discrete or continuous sets of values. An analogous definition, for
a multidimensional (vector) e, is feasible. Whether it is used in existing models is not known to this
author.
Source: Milgrom, 1981, p 383

monotone operator: An operator that preserves inequalities of its arguments. That is, if T is a
monotone operator, then: (i) iff x>y, then Tx>Ty, and iff x<y, then Tx<Ty.
Same basic meaning as monotone transformation.
The most common monotone operator is the natural log function. For example in maximum likelihood
estimation, one usually maximizes the log of the likelihood function, not the likelihood function itself,
because this is more tractable and the log is a monotone operator so it doesn't change the answer.
monotone transformation: A transformation that preserves inequalities of its arguments. That is, if T is
a monotone transformation, then: (i) iff x>y, then Tx>Ty, and iff x<y, then Tx<Ty.
Same basic meaning as monotone operator.
monotonic transformation: A transformation that preserves inequalities of its arguments. That is, if T
is a monotone transformation, then: (i) iff x>y, then Tx>Ty, and iff x<y, then Tx<Ty.
Same as monotone operator (which see, for more details) or monotone transformation.

Monte Carlo simulations: These are data obtained by simulating a statistical model in which all
parameters are numerically specified.
One might use Monte Carlo simulations to test how an estimation procedure would behave, for example
under conditions when exact analytic descriptions of the performance of the estimation are not
algebraically feasible, or when one wants to verify that one's analytic calculation for a confidence
interval is correct.
Moore-Penrose inverse: Same as pseudoinverse.

morbidity: Incidence of ill health. It is measured in various ways, often by the probability that a
randomly selected individual in a population at some date and location would become seriously ill in
some period of time. Contrast to mortality.
Contexts: demography; history
mortality: Incidence of death in a population. It is measured in various ways, often by the probability
that a randomly selected individual in a population at some date and location would die in some period
of time. Contrast to morbidity.
Contexts: demography; history
MSA: Same as SMSA.
Contexts: data
MSE: mean squared error (which see)
multi-factor productivity: Same as total factor productivity, a certain type of Solow residual.
MFP = d(ln f)/dt = d(ln Y)/dt - sLd(ln L)/dt - sKd(ln K)/dt where f is the global production function; Y is
output; t is time; sL is the share of input costs attributable to labor expenses; s K is the share of input
costs attributable to capital expenses; L is a dollar quantity of labor; K is a dollar quantity of capital.
Source: paraphrased from Dean & Harper, Feb. 1998

Contexts: macro
multinomial: In the context of discrete choice models, multinomial means there are more than two
possible values of the dependent variable, the choice, which is a scalar.
For specific constructions see multinomial logit and multinomial probit.

multinomial logit: Relatively easy to compute but has the problematic IIA property by construction.
Multinomial probit with correlation between structural residuals does not suffer from the IIA problem
but is computationally expensive. (Ed.: I don't know why the IIA problem gets sucked into this when the
actual different between logit and probit is the functional form.) Multinomial logit is available in more
software packages than is multinomial probit.
Source: Broadcast by Clint Cummins of TSP International to rec.econ.research circa Jun 28, 2000.
multinomial probit: Multinomial probit with correlation between structural residuals does not suffer
from the IIA problem but is computationally expensive. Multinomial logit which solves a similar
problem is relatively easy to compute but has the problematic IIA property by construction. (Ed.: I don't
know why the IIA problem gets sucked into this when the actual different between logit and probit is the
functional form.) Multinomial logit is available in more software packages than is multinomial probit.
Source: Broadcast by Clint Cummins of TSP International to rec.econ.research circa Jun 28, 2000.
multivariate: A discrete choice model in which the choice is made from a set with more than one
dimension is said to be a multivariate discrete choice model.
Mundell-Tobin effect: That nominal interest rates would rise less than one-for-one with inflation
because in response to inflation the public would hold less in money balances and more in other assets,
which would drive interest rates down.
Source: G. Thomas Woodward, The Review of Economics and Statistics, 1992, p 316
mutatis mutandis: "The necessary changes having been made; substituting new terms."

Contexts: phrases
MVN: An abbrevation for 'multivariate normal' distribution.
Nadaraya-Watson estimator: Used to estimate regression functions based on data {Xi, Yi}. See the
equation in the middle of Hardle's page 25. The equation produces an estimate for Y at any requested
value of X (not only the values of X in the source data), using as input (1) the data set {X i, Yi}, and (2) a
kernel function describing the weights to be put on values in the data set near X in estimating Y. The
kernel function itself can be parameterized by the choice of its functional form and its 'bandwidth' which
scales its width in the X-direction.

Contexts: econometrics; estimation; nonparametrics
NAICS: North American Industry Classification System, a set of industry categories standardized

between the U.S. and Canada. In the U.S. it is taking over from the SIC code system.
For details see http://www.census.gov/epcd/naics02/naicod02.htm.
Source: IO; data
NAIRU: Non-Accelerating Inflation Rate of Unemployment. That is, a steady state unemployment rate
above which inflation would fall and below which inflation would rise. By some estimates the NAIRU
is 6% in the U.S. NAIRU is approximately a synonym for the natural rate of unemployment.
Paraphrased from Eisner's article: The essential hypotheses of the theory that there is a stable NAIRU
are that (1) an existing rate of inflation self-perpetuates by generating expectations of future inflation;
(2) higher unemployment reduces inflation and lower unemployment raises inflation.
Source: Robert Eisner, "Nothing to Fear but Fear of Good News", Wall Street Journal, July 9, 1996.
Contexts: macro
narrow topology: Synonym for weak topology.
Source: Christopher Harris and Patrick Bolton, 1997, "The continuous-time principal-agent problem:
first-best risk-sharing contacts and their decentralization", unpublished paper, p. 6
Contexts: real analysis; micro theory
NASDAQ: National Association of Securities Dealers automatic quotation market. A mostly-electronic

market of stocks in the United States. There is no 'pit' -- market makers in each stock offer buy and sell
prices which are different.
Nash equilibrium: Sets of strategies for players in a noncooperative game such that no single one of
them would be better off switching strategies unless others did.
Formally: Using the normal form definitions, let utility functions as functions of payoffs for the n
players u1() ... un() and sets of possible actions A=A1 x ... x An, be common knowledge to all the
players. Also define a-i as the vector of actions of the other players besides player i. Then a Nash
equilibrium is an array of actions a* in A such that ui(a*) >= ui(a-i* | ai) for all i and all ai in Ai.
In a two-player game that can be expressed in a payoff matrix, one can generally find Nash equilibria if
there are any by, first, crossing out strictly dominated strategies for each player. After crossing out any
strategy, consider again all the strategies for the other player. When done crossing out strategies,
consider which of the remaining cells fail to meet the criteria above, and cross them out too. At the end
of the process, each player must be indifferent among his remaining choices, GIVEN the action of the
others.
In most noncooperatives games of interest, each player has to calculate what the strategies of the others
will be before his own Nash equilibrium strategy can become clear. Introspection may also be needed to
envision his own payoffs. This approach tends to presume that the payoffs are known, or knowable, and
that the players are rational. An alternative line of thought with its own detailed theory, is that the
players can arrive at Nash equilibria by repeated experimentation, searching for an optimal strategy.
Theories of learning and evolutionary game theory are related.

A Nash equilibrium represents a prediction if there is a real world analog to the game.
Source: Notes from Asher Wolinsky

Nash product: The maximand of the Nash Bargaining Solution: (s1-d1)(s2-d2)

where d1 and d2 are the threat points, and s1 and s 2 are the shares of the good to be divided.
Nash strategy: The strategy of a player in a Nash equilibrium.
national accounts: A measure of macroeconomic categories of production and purchase in a nation.

The production categories are usually defined to be output in currency units by various industry
categories, plus imports. (Output is usually approximately the same as industry revenue.) The purchase
categories are usually government, investment, consumption, and exports, or subsets of these. The
amount produced is supposed to be approximately equal to the amount purchased. Measures are in
practice made by national governments.
a different definition, by Peter Wardley:
national accounts: a measure of all the income received by economic actors within an economy. It can
be measured as expenditure (on investment and consumption), income (wages, salaries, profits and rent)
or as the value of output (expenditure of all goods and services). Inevitably these three different methods
of estimating national accounts will produce different results but these discrepancies are usually
relatively small.
With thanks to: Peter Wardley
national innovation systems: A research topic in which it is investigated how differences in national
institutions and characteristics of the economic environment produce different kinds of innovation and
adoption of technologies in different countries.
Examples of institutions which differ between industrialized countries include universities, government
funding of research, and the role of military research. Structural differences can include the country's
size, openness to trade, and idea flow.
This framing, drawn from Mancusi (2004), p. 272 has been attributed to Nelson (1993).
(Ed.: It does not seem to be acknowledged in this literature that the relation between innovations made
in country X and the technology used by the economic actors in country X can be quite weak, since
technologies diffuse so much. The idea that the technologies used in the macroeconomy of a tiny
country are closely related to the government's sponsorship of research in that country breaks down
almost completely if the country is tiny enough and open enough. This effect may have become more
extreme in recent years in which international trade is so great and the Web so easy to use.)
Source: Mancusi, Maria Luisa. "Georgraphical concentration and the dynamics of countries'
specialization in technologies" Economics of Innovation and New Technology 2003, vol 12:3, pp. 269-

291.
Nelson, Richard R. 1993. National Innovation Systems: A Comparative Analysis. Oxford University
Press.
natural experiment: If economists could experiment they could test some theories more quickly and
thoroughly than is now possible. Sometimes an isolated change occurs in one aspect of the economic
environment and economists can study the effects of that change as if it were an experiment; that is, by
assuming that every other exogenous input was held constant.
An interesting example is that of the U.S. ban on the television and radio broadcast of cigarette
advertising which took effect on Jan 2, 1971. The ban seems to have had substantial effects on industry
profitability, the rate of new entrants, the rate of consumers switching brands and types of cigarettes, and
so forth. The ban can be used as a natural experiment to test theories of the effects of advertising.
Contexts: history; data
natural increase: population increase due to more births and less mortality
natural rate of unemployment: "The natural rate of unemployment is the level which would be ground
out by the Walrasian system of general equilibrium equations, provided that there is [e]mbedded in them
the actual structural characteristics of the labor and commodity markets, including market imperfections,
stochastic variability in demands and supplies, the cost of gathering information about job vacancies and
labor availiabilities, the costs of mobility, and so on." -- Milton Friedman, "The Role of Monetary
Policy" AER March 1968 1-21 This is a long-run rate. Transitory shocks could move unemployment
away from the natural rate. Real wages would increase with productivity as long as unemployment were
kept at the natural rate.
Source: Friedman, AER 1968

Contexts: macro; labor
NBER: The U.S. National Bureau of Economic Research. At 1050 Massachusetts Avenue, Cambridge,
MA 02138, USA. Focuses on macroeconomics. Data source by ftp: ftp nber.harvard.edu. NBER web
site
NBS: Nash Bargaining Solution
NE: Nash Equilibrium
NELS: National Educational Longitudinal Survey, a U.S. survey administered to 24,599 eighth grade
students from 1052 schools in 1988, with follow-up surveys to the same students every two years
afterward. Many similar questions were asked of the parents of the students as well to obtain more
accurate information.
Contexts: data

neoclassical growth model: A macro model in which the long-run growth rate of output per worker is
determined by an exogenous rate of technological progress, like those following from Ramsey (1928),
Solow (1956), Swan (1956), Cass (1965), and Koopmans (1965).
Source: Barri and Sala-i-Martin, 1995, pp. 10-12

Contexts: macro
neoclassical model: Often means Walrasian general equilibrium model.
Describes a model in which firms maximize profits and markets are perfectly competive.
Contexts: phrases
neolassical: According to Lucas (1998), neoclassical theory has explicit reference to preferences.
Contrast classical.
Source: Lucas (1998)

Contexts: phrases; macro theory
nests: We say "model A nests model B" if every version of model B is a special case of model A. This
can be said of either structural (theoretical) or estimated (econometric) models.
Example: Model B is "Nominal wage is an affine function of the age of the worker." Model A is
"Nominal wage is an affine function of the age and education of the worker." Here model A nests model
B.
Contexts: phrases
netput: Stands for "net output". A quantity, in the context of production, that is positive if the quantity
is output by the production process and negative if it is an input to the production process. A technology
is often be defined in a model by restrictions on the vector of netputs with the dimension of the number
of goods.
network externalities: The effects on a user of a product or service of others using the same or
compatible products or services. Positive network externalities exist if the benefits are an increasing
function of the number of other users. Negative network externalities exist if the benefits are a
decreasing function of the number of other users.
Katz and Shapiro, 1985 consider two types of positive network externalities. A communication
externality or direct externality describes a communication network in which the more subscribers there
are the greater the services provided by the network (e.g. the telephone system or the Internet). An
indirect externality or hardware-software externality exists if a durable good (e.g. computer) is
compatible with certain complementary goods or services (e.g. software) and the owner of the durable
good benefits if their system is compatible with a large pool of such complementary goods. Liebowitz
and Margolis, 1994 have an insightful commentary on this subject, and offer among other things the
following example: "if a group of breakfat-eaters joins the network of orange juice drinkers, their
increased demand raises the price of orange juice concentrate, and thus most commonly effects a
transfer of wealth from their fellow network members to the network of orange growers." The new

group negatively affects the old group without compensation, but it is through the price system and is
therefore a pecuniary externality. These authors strongly make the case that big network externalities are
not often observed, and cite evidence against two common examples, the QWERTY and VHS standards.
Contexts: IO
neutral technological change: Refers to the behavior of technological change in models. Barro and
Salai-i-Martin (1995), page 33, refer to three types:
A technological innovation is Hicks neutral (following Hicks (1932)) if the ratio of capital's marginal
product to labor's marginal product is unchanged for a given capital to labor ratio. That is: Y=T(t)F
(K,L).
A technological innovation is Harrod neutral (following Hicks (1932)) if the technology is labor-
augmenting ... contd, see barro p 33 ...
neutrality: "Money is said to be neutral [in a model] if changes in the level of nominal money have no
effect on the real equilibrium." -- Blanchard and Fisher, p. 207
.
Money might not be neutral in a model if changes in the level of nominal money induce self-fulfilling
expectations or interact with real frictions like fixed nominal wages, fixed nominal prices, information
asymmetries, or slow reactions by households to adjust their money holding quickly. (This list from a
talk by Martin Eichenbaum, 11/11/1996.)
Source: Blanchard and Fischer p. 207

Contexts: macro; money; models
New Classical view: On policy -- that no systematic (that is, predictable) monetary policy matters.
Source: Branson
Contexts: macro
New Economy: A proper noun, describing one of several aspects of the late 1990s. Lipsey (2001) has
discerned these meanings:
(1) An economy characterized by the absence of business cycles or inflations.
(2) The industry sectors producing computers and related goods and presumably services such as e-
commerce.
(3) An economy characterized by an accelerated rate of productivity growth.
(4) The "full effects on social, economic, and political systems of the [information and communications
technologies] revolution" centered on the computer. This is Lipsey's meaning.
Source: Lipsey, Richard G. " The productivity paradox: a case of the emporer's new clothes. " July 2001.
Contexts: phrases
new growth theory: Study of economic growth. Called 'new' because unlike previous attempts to model
the phenomenon, the new theories treat knowledge as at least partly endogenous. R&D is one path.
Hulten (2000) says that the new growth theories have the new assumption that the marginal product of
capital is constant rather than in diminishing as in the neoclassical theories of growth. Capital often in
the new growth models includes investments in knowledge, research and development of products, and

human capital.
Source: Hulten (2000), p. 37

Contexts: macro
new institutionalism: A school of thought in economic history, linked to the work of Douglas North.
New institutionalist. "This body of literature has claimed that, in history, institutions matter, and in
empirical analyses of history, institutions typically refer to those provided by the state: a currency, stock
market, property rights, legal system, patents, insurance schemes, and so on." The literature Hopcroft
cites includes: North 1990b; North 1994; North and Thomas 1973; North and Weingast 1989; Bates
1990, p. 52; Campbell and Lindberg 1990; Eggertson 1990, pp 247-8; Cameron 1993, p. 11. p 35:
"Using the terminology of the new institutionalizsm, field systems in preindustrial Europe were
produces of local institutions. Institution is defined as a system of social rules, accompanied by some
sort of enforcement mechanism. Rules may be formal in nature -- for exapmle, legislation, constitutions,
legal specifications of property rights, and so on (Coase 1960; Barzel 1989; North 1982: 23) -- or
informal in nature -- for example, cultural norms, customs, and mores (North 1990a: 192; Knight 1992) .
. . ." All these are from Hopcroft, Rosemary L. "Local Institutions and Rural Development in European
History" Social Science History 27:1 (spring 2003), pp 25-74.
Source: Hopcroft, Rosemary L. "Local Institutions and Rural Development in European History" Social
Science History 27:1 (spring 2003), pp 25-74.
Contexts: history
NIPA: Stands for the National Income and Product Accounts. This is a GDP account for the United
States.
Contexts: data
NLLS: Stands for Nonlinear least squares, an estimation technique. The technique is to choose the
parameter, b, of assumed distribution pdf f(), to minimize this expression: sum over all i of (y i-f(xi, b))2
where the xi's are the independent data, yi's are the dependent data.
NLREG: Stands for Nonlinear Statistical Regression program, discussed at

http://www.sandh.com/sherrod/nlreg.html.
Contexts: data; estimation
NLS: National Longitudinal Survey, done at the U.S. Bureau of Labor Statistics.
Contexts: labor; data
NLSY: "The National Longitundinal Survey of Youth is a detailed survey of more than 12,000 young
people from 1979 through 1987. The original 1979 sample contained 12,686 youths age 14 to 21, of
whom 6,111 represented the entire population of youths and 5,295 represented an oversampling of
civilian Hispanic, black, and economically disadvantages non-Hispanic, nonblack youth. An additional
1,280 were in the military. [ed.: meaning, their parents were?] The survey had a remarkably low attrition
rate -- 4.9 percent through 1984 -- and thus represents the largest and best available longitudinal data set

on youths in the period under study."
NLS web site.
Source: Freeman, 1991, p 103-4.

NLSYW: National Longitudinal Survey of Young Women, done at the U.S. Bureau of Labor Statistics.
NNP: Net National Product. "Net national product is the net market value of the goods and services
produced by labor and property located in [a nation]. Net national product equals GNP [minus] the
capital consumption allowances, which are decudted from gross private domestic fixed investment to
express it on a net basis." -- Survey of Current Business
Source: Survey of Current Business

Contexts: macro
no-arbitrage bounds: Describes the outer limits on a price in a model where that price must meet a no-
arbitrage condition.
In many models a price is completely determined by a no-arbitrage condition, but if some frictions are
modeled -- transactions costs or liquidity constraints, for example -- then a no-arbitrage condition
defines a range of possible prices, because tiny variations from the theoretical no-arbitrage price are not
large enough to make arbitrage profits feasible. The range of possible prices is bounded by the "no-
arbitrage bounds"
Source: McDonald, Robert L. 1998. "Dividend Tax Credits, the Ex-day, and Cross-Border Tax
Arbitrage: The Case of Germany", Working paper, Kellogg School of Management's Finance
department, Northwestern University. Page 4 has an example of this term in use.
Contexts: finance
noise trader: In models of asset trading, a noise trader is one who doesn't have any special information
but trades for exogenous reasons; e.g., to raise cash.
Such trades make a market liquid for other traders; that is, they give a given trader someone to exchange
with.
Contexts: finance
noncentral chi-squared distribution: If n random values z1, z2, ..., zn are drawn from normal
distributions with known nonzero means and constant variance, then squared, and summed, the resulting
statistic is said to have a noncentral chi-squared distribution with n degrees of freedom: z12 + z22 + ... +
zn2) ~ X2(n, ) This is a two-parameter family of distributions. Parameter n is conventionally labeled the
degrees of freedom of the distribution. Parameter  is the noncentrality parameter. It is related to the
means i and variance 2 of the normal distributions thus: =(sum for i=1 to n) of (i2 / 2). The mean
of a distribution that is X 2(n, ) is (n+). The variance of that distribution is (2n+4).

Source: Hogg and Craig, p 288-291

Contexts: statistics; econometrics; estimation
noncooperative game: A game structure in which the players do not have the option of planning as a
group in advance of choosing their actions. It is not the players who are uncooperative, but the game
they are in.
nondivisibility of labor: If one models labor as contractible in continuous units, workers as identical,
and workers' utility functions as concave in leisure and income, an optimal outcome is often for all
workers to work some fraction of the time. Then none are unemployed. We do not observe this.
If instead one presumes that labor cannot be effectively contracted in continuous units but must be
purchased in blocks (e.g. of eight hours per day, or forty per week), this aspect can generate unemployed
workers in the model while others work long schedules, even if the workers are otherwise identical.
Labor may have to be sold in such blocks for several observed reasons: (a) because there are fixed costs
to the employer of employing each worker; (b) because there are fixed costs (e.g. transportation;
dressing for work) to the employee of each job. This idea of labor as nondivisible has been used in
macro models by Gary Hansen (1985) and Richard Rogerson (1988).
Contexts: macro
nonergodic: A time series process {xt} is nonergodic if it is so strongly dependent that it does not
satisfy the law of large numbers. (Paraphrased straight from Wooldridge.)
Source: Discussed in Wooldridge, 1995, p 2647

nonlinear pricing: A pricing schedule where the mapping from quantity purchased to total price is not a
strictly linear function. An example is affine pricing.

Contexts: IO
nonparametric: In the context of production theory (e,g, hulten 2000 circa p 21) a nonparametric index
number would not be derived from a specific functional form of the production function.
See also nonparametric estimation.
nonparametric estimation: Allows the functional form of the regression function to be flexible.
Parametric estimation, by contrast, makes assumptions about the functional form of the regression
function (e.g. that it is linear in the independent variables) and the estimate is of those parameters that
are free.


nonprofit: A nonprofit organization is one that has committed legally not to distribute any net earnings
(profits) to individuals with control over it such as members, officers, directors, or trustees. It may pay
them for services rendered and goods provided.
Source: Hansmann, Henry B. "The Role of Nonprofit Enterprise." The Yale Law Journal, Vol 89, No 5,
April 1980.
Contexts: public economics; law and economics
nonuse value: Synonym for existence value.
Source: Portney, 1994; Krutilla, 1967

NORC: National Opinion Research Center at the University of Chicago.
Contexts: data
normal distribution: A continuous distribution of major importance. Cdf is often denoted by capital 
(x). Pdf is often denoted by little (x).
The cdf and pdf are not representable in html. The distribution has two parameters, mean  and variance
2. Has moment-generating function M(t)=exp(*t + .5*2t2).
> 
 
Contexts: statistics; econometrics 
 
normal form:<a name=

A way of writing out a game. Synonymous with strategic form.
Formally:
let n be the number of players,
let Ai be the set of possible actions (or strategies) of player i,
and let ui:A1 x A2 x ... x An -> R represents the payoff function (or utility function) for player i. That is
once all players have chosen that set of actions, the payoff for player i is the value of that function.
Then the normal form of the game is characterized by G = (A 1, A2, ... An, u1, ... , un)
normality: When used to describe a random variable, means that it has a normal distribution.
notation: Unusual notation, hard to put in glossary for definition, is listed here:
2A has a particular meaning. For a finite set A, the expression 2 A means "the set of all subsets of A.". If
as is standard we denote the number of elements in set A by |A|, the number of elements in 2A is 2|A|.
Contexts: set theory; mathematics; probability
NPV: Net Present Value. Same as PDV (present discounted value).

Contexts: finance
NSF: The U.S. National Science Foundation, which funds much economic research.
null hypothesis: The set of restrictions on parameters that is formally being tested. "The hypothesis that
the restriction or set of restrictions to be tested does in fact hold." (Davidson and MacKinnon, 1993, p.
78) It is standard to use the notation H 0 for the null hypothesis. The alternative hypothesis, that the
restrictions do not hold is denoted H 1.
Often H1 is the conjecture of interest to the investigator. (Hogg and Craig, p. 281) The problem gets
framed this way so that the data and statistical methods can potentially reject H 0. The term is from
formal statistical language describing the test to which the restrictions are being subjected. The real
hypothesis of interest to the investigator may not be either H0 nor H1. Even if it is H1, the statistical
rejection of H0 may not be strong and specific evidence.

numeraire: The money unit of measure within an abstract macroeconomic model in which there is no
actual money or currency. A standard use is to define one unit of some kind of goods output as the
money unit of measure for wages.
Source: An example is in Arrow, Chenery, Minhas, and Solow, 1961

NYSE: New York Stock Exchange, the largest physical exchange in the U.S. Is in New York City.
obsolescence: An object's attribute of losing value because the outside world has changed. This is a
source of price depreciation.
ocular regression: A term, generally intended to be amusing, for the practice of looking at the data to
estimate by eye how data variables are related. Contrast formal statistical regressions like OLS.
ODE: Abbreviation for "ordinary differential equation".
Contexts: math
OECD: Organization of Economic Cooperation and Development; includes about 25 industrialized

democracies.
OES: The Occupational Employment Statistics survey of the United States, conducted by its Bureau of

Labor Statistics. It surveys approximately 400,000 establishments each year, excluding those in
agriculture, forestry, fishing, and the national government.
Source: Jeffrey A. Groen working paper, 2003.

BLS web site.
Contexts: U.S.; data
offer curve: Consider an agent in a general equilibrium (e.g., an Edgeworth box). Assume that agent has
a fixed known budget and known preferences which predict what set (or possible sets) of quantities that
agent will demand at various relative prices. The offer curve is the union of those sets, for all relative
prices, and can be drawn in an Edgeworth box.

OLG: Abbreviation for overlapping generations model, in which agents live a finite length of time long
enough to live one period at least with the next generations of agents.
Contexts: models
oligopsony: The situation in which a few, possibly collusive, buyers are the only ones who buy a certain
good.
Has the same relation to monopsony that oligopoly has to monopoly.
Contexts: IO; labor
OLS: Ordinary Least Squares, the standard linear regression procedure. One estimates a parameter from
data and applying the linear model
y = Xb + e
where y is the dependent variable or vector, X is a matrix of independent variables, b is a vector of
parameters to be estimated, and e is a vector of errors with mean zero that make the equations equal.
The estimator of b is: (X'X)-1X'y
A common derivation of this estimator from the model equation (1) is:
y = Xb + e
Multiply through by X'. X'y = X'Xb + X'e
Now take expectations. Since the e's are assumed to be uncorrelated to the X's the last term is zero, so
that term drops. So now:
E[X'Xb] = E[X'y] Now multiply through by (X'X)-1 E[(X'X)-1X'Xb] = E[(X'X)-1X'y] E[b] = E[(X'X)-
1X'y] Since the X's and y's are data the estimate of b can be calculated.
omitted variable bias: There is a standard expression for the bias that appears in an estimate of a
parameter if the regression run does not have the appropriate form and data for other parameters.
Define: y as a vector of N dependent variable observations, X 1 as an (N by K1) matrix of regressors, X2

as an (N by K2 matrix of additional regressors), and e as an (N by 1) vector of disturbance terms with
sample mean zero.
Suppose the true regression is:

y = X1b1 + X2b2 + e
for fixed values of b1 and b2. (If "true regression" seems ambiguous, imagine for the rest of the
description that the values of X1, X2, b1, and b2 were chosen in advance by the econometrician and e
will be chosen by a random number generator with expectation zero, and y is determined by these
choices; in this framework we can be certain what the true regression is and can study the behavior of
possible estimators.)
Suppose given the data above one ran the OLS regression
y = X1c1 +errors
Would E[c1]=b1 despite the absence of X2b2? It will turn out in the following derivation that in most
cases the answer is no and the difference between the two values is called the omitted variable bias.
The OLS estimator for c1 will be:
c1OLS = (X1'X1)-1X1'y
= (X1'X1)-1X1'(X1b 1 + X2b2 + e)
= (X1'X1)-1X1'X1b1 + (X1'X1)-1X1'X2b2 + (X1'X1)-1X1'e
= b1 + (X1'X1)-1X1'X2b2 + (X1'X1)-1X1'e
So since E[X1'e] = 0, taking expectations of both sides gives:
E[c1] = b1 + (X1'X1)-1X1'X2b2
In general c1OLS will be a biased estimator of b 1. The omitted variables bias is (X1'X1)-1X1'X2b2 .
An exception occurs if X1'X2=0. Then the estimator is unbiased.
There is more to be learned from the omitted variables bias expression. Leaving off the final b 2, the
expression (X1'X1)-1X1'X2b2 is the OLS estimator from a regression of X 2 on X1.

Op(1): statistical abbreviation for "converges in distribution" or, equivalently, "the average is bounded
in probability."
That is Xt/n is bounded in probability.
open: An economy is said to be open if it has trade with other economies. (Implicitly these are usually
assumed to be countries.)

One measure of a country's openness is the fraction of its GDP devoted to imports and exports.
option: A contract that gives the holder the right, but not the duty, to make a specified transaction for a
specified time.
The most common option contracts give the holder the right buy a specific number of shares of the
underlying security (equity or index) at a fixed price (called the exercise price or strike price) for a given
period of time. Other option contracts allow the holder to sell.
This is its most common practical business meaning, and the use in theoretical economics is analogous -
- e.g. that owning a plant gives a firm the option to manufacture in it at any time or to sell it at any time.
order condition: In a econometric system of simultaneous equations, each equation may satisfy the
order condition, or not do so. If it does not, its parameters are not all identified.
The order condition is often easy to verify. Often the econometrician verifies that the order condition is
satisfied and assumes with this justification that the equation is identified, although formally a stronger
requirement, the rank condition, must be satisfied. For each equation there must be enough instrumental
variables available for the equation to have as many instruments as there are parameters.
The system can satisfy a form of the order condition: that there be as many exogenous variables in the
reduced form of the system as there are parameters.
order of a kernel: The order of a kernel function is defined as the first nonzero moment.
Source: Hardle and Linton paper, June 1993, "Applied Nonparametric Methods"
Contexts: econometrics; nonparametrics
order of a sequence: Two relevant concepts are denoted O() and o().
Let cn be a random sequence. Quoting from Greene, p 110: "c n is of order 1/n, denoted O(1/n), if plim
ncn is a nonzero constant."
And
"cn is of order less than 1/n, denoted o(1/n), if plim nc n equals 0."

order statistic: The first order statistic of a random sample is the smallest element of the sample. The
second order statistic is the second smallest. And the n th order statistic in a sample of size n is the largest
element. The pdf of the order statistics can be derived from the pdf from which the random sample was
drawn.
Source: Hogg and Craig, 1995, pp. 193-200.


organizational capital: "whatever makes a collection of people and assets more productive together
than apart. Firm-specific human capital (Becker 1962), management capital (Prescott and Visscher
1980), physical capital (Ramey and Schapiro 1996), and a cooperative disposition in the firm's
workforce (Eeckhout 2000 and Rb and Zemsky 1997) are examples of organizational capital." -- from
Boyan Jovanovic and Peter L. Rousseau, Sept 20 2000, "Technology and the Stock Market: 1885-1998"
NYU and Vanderbilt University, working paper
Source: Boyan Jovanovic and Peter L. Rousseau, Sept 20 2000, "Technology and the Stock Market:
1885-1998" NYU and Vanderbilt University, working paper
organizational routines: Almost all of this is condensed from the literature review in Becker (2004).
Organizational routines are recurrent sequences of behavior, or related cognitive patterns such as rules
and recipes, in organizations. These are context-specific ways of coordinating multiple actors. Generally
they achieve, or enable, a systematic response to events or input by the organization. Routines therefore
store operational or tacit knowledge.
Organizational routines tend:

- to have path-dependent, local histories
- to satisfice, that is, reach a kind of level of aspriation, and not to be tested for optimality
- to be triggered, perhaps by performance below that level of aspiration, which may be implicit
- to exert control in the context of uncertainty, and by being standardized across events, to enable
measurement of processes within the organization
- to reduce surprises, error handling, and emergency handling of inputs
- to create or tolerate some internal delays by definition
- to economize on cognitive resources like the information processing and decision capacity of agents
within the organization, by defining structures of response
- to guide inexperienced members of the organization
- to provide stability and predictability, but also to evolve with time Organizational routines may serve
as heuristics or guidelines, not rules.
Becker (2004) treats Nelson and Winter (1982), as a central source work in this area, and cites a variety
of empirical and theoretical academic literature on organizational routines.
Organizational routines are so common it's not clear whether one example clarifies the subject but I
inferred that this was a good example. Suppose an organization maintains software, and converts
complaints and bug reports about this software into records in a database (classically, a "bugbase")
which will be addressed in a substantively appropriate way by specialists. This mode of behavior is an
organizational routine that satisfies the above description. The substance and addressee of each bug
report record will vary; the substance includes the uncertain input from outside, plus various tacit
information like the appropriate addressee.
Source: Becker, Markus C. "Organizational routines: a review of the literature." Industrial and
Corporate Change. Vol 13, no. 4 (August 2004), pp. 643-677.
Nelson, R.R., and S.G. Winter. 1982. An Evolutionary Theory of Economic Change. Belknap
Press/Harvard University Press: Cambridge, MA.
Contexts: management; sociology; organizations
organizations:

Relevant terms: absorptive capacity, ACIR, AMEX, competency trap, EMS, EOE, FIPS, institution,
NBER, NSF, organizational capital, organizational routines, SOFFEX, TRIPs, WIPO, World Bank.
Contexts: fields
output elasticity: "The output elasticity of an input is roughly the percentage increase in output for a 1
percent [increase] in that input, holding other factors constant. If [an] input has a 'normal' rate of return,
then [its] output elasticity should equal its share of total inputs." -- Hitt and Brynjolfsson (2002), p. 85.
The output elasticity idea presumes that somebody is monitoring a production function and adjusting
production to maximize something, perhaps output, revenue, or profit. It also presumes the input and
output are continuous so that small changes in inputs and outputs are well-defined (e.g., we are not
talking about a slight increase over one hand-crafted violin per year; the abstraction of output elasticity
of inputs applies poorly in a case like that). For more on elasticity and concepts analogous to output
elasticity, see elasticity.
Source: Hitt, Lorin M., and Erik Brynjolfsson. 2002. "Information Technology, Organizational
Transformation, and Business Performance." Chapter 2 of Productivity, Inequality, and the Digital
Economy, edited by Nathalie Greenan, Yannick L'Horty, and Jacques Mairesse. The MIT Press.
Contexts: micro; estimation; industrial organization
outside money: monetary base. Is held in net positive amounts in an economy. Is not a liability of
anyone's. E.g., gold or cash. Contrast inside money.
overshooting: Describes "a situation where the initial reaction of a variable to a shock is greater than its
long-run response."
own: This word is used in a very particular way in the discussion of time series data. In the context of a
discussion of a particular time series it refers to previous values of that time series. E.g. 'own temporal
dependence' as in Bollerslev-Hodrick 92 p 8 refers to the question of whether values of the time series in
question were detectably a function of previous values of that same time series.
Ox: An object-oriented matrix language sometimes used for econometrics. Details are at
http://hicks.nuff.ox.ac.uk/Users/Doornik/doc/ox/ .
p value: A p-value is associated with a test statistic. It is "the probability, if the test statistic really were
distributed as it would be under the null hypothesis, of observing a test statistic [as extreme as, or more
extreme than] the one actually observed."
The smaller the P value, the more strongly the test rejects the hypothesis being tested (the null
hypothesis).
A p-value of .05 or less rejects the null hypothesis "at the 5% level" that is, the statistical assumptions
used imply that only 5% of the time would the supposed statistical process produce a finding this

extreme if the null hypothesis were true.
5% and 10% are common significance levels to which p-values are compared and in academic seminars,
a p-value of .05 is treated as strong evidence that the result is a signal, not just noise.
Source: Davidson and MacKinnon, 1993, p 78-79 ; and with relieved thanks to Ed DeMattia and Steven
Hetzler for pointing out that this definition was mistaken before fall 2005.
With thanks to: Ed De Mattia;
Paasche index: A kind of index number. The official method for US price deflators computes them as a
Paasche index. The algorithm is just like the Laspeyres index but the base quantities are chosen from the
second, later period.
See also http://www.geocities.com/jeab_cu/paper2/paper2.htm. From Aizcorbe (2004), p.9: If one

assumes there is a representative consumer then the Paashe index can be, and has been, interpreted as a
lower bound for the representative consumer's cost of living increase. That is, it shows the change in
income needed to make the representative consumer indifferent between purchasing current quantities at
the base and current time periods.
Source: http://www.geocities.com/jeab_cu/paper2/paper2.htm;
Gordon, 1990, p. 5
Aizcorbe, Ana. "Price Indexes for Intermittent Purchases and an Application to Price Deflators for High
Technology Goods" working paper, Bureau of Economic Analysis, U.S. Department of Commerce.
panel data: Data from a (usually small) number of observations over time on a (usually large) number
of cross-sectional units like individuals, households, firms, or governments.
par: Can by a synonym for 'face value' as in the expression "valuing a bond at par".
Contexts: finance
paradox: This word is used in a particular way within the literature of economics -- not to describe a
situation in which facts are apparently in conflict, but to describe situations in which apparent facts are
in conflict with models or theories to which some class of people holds allegiance. This use of the word
implies strong belief in the measured facts, and in the theory, and the resolution to economic paradoxes
tend to be of the form that the data do not fit the model, the data are mismeasured or, (the most common
case) the model or theory does not fit the environment measured.
In some ways the term paradox is awkward in economics since the data are so poorly measured, the
models so brutally simplified, and the mapping between environment and evidence so stochastic. So this
editor avoids the term where possible, but often it is a compact and vigorous way of telling the reader
the context of the subsequent discussion.
A list of these that an economist may be expected to recognize includes: Allais paradox, Ellsberg
paradox, Condorcet voting paradox, Scitovsky paradox, and productivity paradox.

Contexts: phrases
parametric: adjective. A function is 'parametric' in a given context if its functional form is known to the
economist.
Example 1: One might say that the utility function in a given model is increasing and concave in
consumption. But it only becomes parametric once one says that u(c)=ln(c) or u(c)=c 1-A/1-A. At this
point only parameters such as A remain to be specified or estimated.
Example 2: In an econometric model one often imposes assumptions such as that the the relationship
being estimated is linear, thence to do a linear regression. These are parametric assumptions. One might
also make some estimates of the 'regression function' (the relationship) without such parametric
assumptions. This field is called nonparametric estimation.
Contexts: econometrics; estimation; models
Pareto chart: The message below was posted to a Stata listserv and is reproduced here without any
permission whatsoever.
Date: Thu, 28 Jan 1999 08:59:57 -0500

From: "Steichen, Thomas"
Subject: RE: statalist: Re: Pareto diagrams
[snip]
Pareto charts are bar charts in which the bars are arranged in descending
order, with the largest to the left. Each bar represents a problem. The chart
displays the relative contribution of each sub-problem to the total problem.
Why: This technique is based on the Pareto principle, which states that a
few of the problems often account for most of the effect. The Pareto
chart makes clear which "vital few" problems should be addressed first.
How: List all elements of interest. Measure the elements, using the same
unit of measurement for each element. Order the elements according to
their measure, not their classification. Create a cumulative distribution
for the number of items and elements measured and make a bar and line
graph. Work on the most important elements first.
Reference: Wadsworth, Stephens and Godfrey. Modern Methods for Quality

Control and Improvement, New York: John Wiley, 1986 and Kaoru Ishikawa,
Guide To Quality Control, Asian Productivity Organization, 1982, Quality
Resources, 1990.
(Note: above info "borrowed" from a web page)
Source: Stata listserv

With thanks to: Statalist and Thomas Steichen , as of 4/15/1999
Pareto distribution: Has cdf H(x) = 1 - x(-a) where x>=0, a>0. This distribution is unbounded above.
(A slightly different version, with two parameters, is shown in Hogg and Craig on p. 207.)

>
 
Contexts: econometrics; statistics 
 
Pareto optimal:<a name=

In an endowment economy, an allocation of goods to agents is
Pareto Optimal if no other allocation of the same goods would be preferred by every agent. Pareto
optimal is sometimes abbreviated as PO.
Optimal is the descriptive adjective, whereas optimum is a noun. A Pareto optimal allocation is one that
is a Pareto optimum. There may be only one such optimum.
Contexts: models
Pareto set: The set of Pareto-efficient points, usually in a general equilibrium setting.

partially linear model: Refers to a particular econometric model which is between a linear regression
model and a completely nonparametric model:
y=b'X+f(Z)+e
where X and Z are known matrices of independent variables, y is a known vector of the dependent
variable, f() is not known but often some assumptions are made about it, and b is a parameter vector.
Assumptions are often made on e such as that e~N(0,s2I) and that E(e|X,Z)=0.
The project at hand is to estimate b and/or to estimate f() in a non-parametric way, e.g. with a kernel
estimator.
Source: possibly first discussed in Robinson, P., 1988, "Root-n-consistent semiparametric regression",
Econometrica vol 56, pp 931-954.
partition: "[A] partition of a finite set (capital omega) is a collection of disjoint subsets of (capital
omega) whose union is (capital omega)." -- Fudenberg and Tirole p 55
Source: Fudenberg and Tirole, 1991/1993, p 55

Contexts: information theory; econometrics; micro theory
passive measures (to combat unemployment): unemployment and related social benefits and early
retirement benefits. (contrast active)
Source: John P. Martin, D16 readings book

path dependence: Following David (97): describes allocative stochastic processes. Refers to the way
the history of the process relates to the limiting distribution of the process. "Processes that are non-
ergodic, and thus unable to shake free of their history, are said to yield path dependent outcomes." (p.
13) "A path-dependent stochastic process is one whose asymptotic distribution evolves as a
consequence" of the history of the process. (p. 14) The term is relevant to the outcome of economic
processes through history. For example, the QWERTY keyboard standard would not be the standard if it

had not been chosen early; thus the keyboard standard evolved through a path-dependent process.
Source: David, 1997, p 13-14

Contexts: history; stochastic processes
path dependency: The view that technological change in a society depends quantitatively and/or
qualitatively on its own past. "A variety of mechanisms for the autocorrelation can be proposed. One of
them, due to David (1975) is that technological change tends to be 'local,' that is, learning occurs
primarily around techniques in use, and thus more advanced economies will learn more about advanced
techniques and stay at the cutting edge of progress." (Mokyr, 1990, p 163) A noted example of
technological path dependence is the QWERTY keyboard, which would not be in use today except that
it happened to be chosen a hundred years ago. A special interest in the research literature was taken in
the question of whether technological path dependence has been observed to lead to noticeably Pareto-
inferior outcomes later. Liebowitz and Margolis in a series of papers (e.g. in the JEP) have made the
case that it has not -- that is that the QWERTY keyboard is not especially inferior to alternatives in
productivity, and that the VHS videotapes were not especially inferior to Beta videotapes at the time
consumers chose between them.
Source: Mokyr, 1990, p 163

Contexts: stochastic processes; history
payoff matrix: In a game with two players, the payoffs to each player can be shown in a matrix. The
one at right is from the classic Prisoners Dilemma game:
Player Two
Here, player one's strategy choices (shown, conventionally, on the left) are C
C D
and D, and player two's, shown on the top, are also C and D. The payoffs of
each possible choice of strategy pairs is in each cell of the matrix. The first C 3,3 0,4
Player One
number is the payoff to player one, and the second is the payoff to player two. D 4,0 1,1
PBE: abbreviation for perfect Bayesian equilibrium.
pdf: probability distribution function. This function describes a statistical distribution. It has the value,
at each possible outcome, of the probability of receiving that outcome. A pdf is usually denoted in lower
case letters. Consider for example some f(x), with x a real number is the probability of receiving a draw
of x. A particular form of f(x) will describe the normal distribution, or any other unidimensional
distribution.
PDV: Present Discounted Value
Contexts: finance
pecuniary externality: An effect of production or transactions on outside parties through prices but not
real allocations.

perfect Bayesian equilibrium: A perfect Bayesian equilibrium is a game-theoretic concept. It is very

like a Nash equilibrium but in which each player's beliefs are also defined and are integrated into the
definition.
A perfect Bayesian equilibrium (PBE) is defined to exist in a game in which payoffs and players are
stated and are common knowledge within the game. It can be described by this set of things taken
together:
- a profile of strategies and

- a profile of belief functions
To be a PBE they also satisfy these rules:

- the strategies satisfy sequential rationality rule and
- the beliefs are updated over time according to Bayes rule whenever possible.
[Ed.: Normally one also assumes that the players know with certainty that they are in a PBE. Without
this assumption it may not be possible to locate any PBE of the game, but with this assumption this
equilibrium is less likely to describe the real world.]
-- F&T 1993? pp 321-333
it also describes separating and pooling equilibria as subsets of PBE

There is a thm in Kreps that all seq eqms are also subgame perfect.
perfect equilibrium: In a noncooperative game, a profile of strategies is a perfect equilibrium if it is a

limit of epsilon-equilibria as epsilon goes to zero.
There can be more than one perfect equilibrium in a game.

PERT: Program Evaluation and Review Technique (is this used?)
Source: Hogg and Craig, 163-4
phase portrait: graph of a dynamical system, depicting the system's trajectories (with arrows) and
stable steady states (with dots) and unstable steady states (with circles) in a state space. The axes are of
state variables.
Contexts: models
Phillips curve: A relation between inflation and unemployment. Follows from William Phillips' 1958
"The relation between unemployment and the rate of change of money wage rates in the United
Kingdom, 1861-1957" in _Economica_. In the subsequent discussion the relation was thought to be a
negative one -- high unemployment would correlate with low inflation. That stylized fact lost empirical
support with the stagflation of the U.S. in the 1970s, in which high inflation and high unemployment

occurred together. More recent evidence suggests that over the long term, across countries, there is a
POSITIVE correlation between inflation and unemployment. Discussion continues on which of these is
more 'causal to' the other and less 'caused by' the other. In recent use, "[T]he 'Phillips curve' has become
a generic term for any relationship between the rate of change of a nominal price or wage and the level
of a real indicator of the intensity of demand in the economy, such as the unemployment rate." --
Gordon, Robert G., "Foundations of the Goldilocks Economy" for Brookings Panel on Economic
Activity, Sept 4, 1998.
Contexts: macro
Phillips-Perron test: A test of a unit root hypothesis on a data series.
(Ed.: what follows is my best, but imperfect, understanding.) The Phillips-Perron statistic, used in the
test, is a negative number. The more negative it is, the stronger the rejection of the hypothesis that there
is a unit root at some level of confidence. In one example a value of -4.49 constituted rejection at the p-
value of .10.
Source: cites of Phillips, Peter C.B. and Pierre Perron. "Testing for a Unit Root in Time Series
Regression." Biometrika June 1988, 75, pp 335-346.
With thanks to: Don Watson (as of 1999/03/31: drw@matilda.vm.edu.au)
phrases:
Relevant terms: a fortiori, a priori, abstracting from, analytic, budget line, ceteris paribus, Chicago
School, classical, climacteric, control for, corner solution, creative destruction, deterministic, dismal
science, endogenous, equity premium puzzle, exogenous, inter alia, interior solution, is consistent for,
mutatis mutandis, neoclassical model, neolassical, nests, New Economy, ocular regression, paradox,
priori, proof, quango, rational, rational ignorance, rationalize, risk free rate puzzle, significance, solution
concept, stylized facts, the standard model, transition economics, under the null, unity.
Contexts: fields
physical depreciation: Decline in ability of assets to produce output. For example, computers, light
bulbs, and cars have low physical depreciation; they work until they expire. Could be said to be made up
of deterioration and exhaustion.
Contexts: macro; capital measurement
piecewise linear: A set of line segments each of which represents a linear relationship between two
variables over some subset of their domains. Usually the relationship referred to is between what the
writer is characterizing as an independent variable and a dependent variable.
Contexts: mathematics; theory; estimation
Pigou effect: The wealth effect on consumption as prices fall. A lower price level leads to a greater
existing private wealth of nominal value, leading to a rise in consumption. Contrast the Keynes effect.
Source: James Tobin. "Keynesian Models of Recession and Depression"

plant: a plant is an integrated workplace, usually all in one location.

platykurtic: An adjective describing a distribution with low kurtosis. 'Low' means the fourth central
moment is less than three times the second central moment; such a distribution has less kurtosis than a
normal distribution.
Platy- means 'fat' in Greek and refers to the central part of the distribution. Platykurtic distributions are
not as common as leptokurtic ones.

PO: Pareto Optimal
Contexts: models
Poisson distribution: A discrete distribution. Possible values for x are the integers 1,2,3,...
Denoting mean as mu, the Poisson distribution has mean mu, variance mu, and pdf (e-mumu-x)/x!.
Moment-generating function (mgf) is exp(mu(e t-1)).
Source: Hogg and Craig

Poisson process: In such a process, let n be the number of events that occur in a given time. n will have
a Poisson distribution.
Contexts: statistics; models
political science: The academic subject centering on the relations between governments and other
governments, and between governments and peoples.
polity: Group with an organized governance. Normally a politically organized population or can be a
religious one.
Or, form of governance.
Examples needed. Use is very context-sensitive; that is, the definition is not too informative without
examples.
polychotomous choice: Multiple choice. In the context of discrete choice econometric models, means
that the dependent variable has more than two possible values.
Source: Maddala, 1983, 1996, p 275

pooling of interests: One of two ways to do the accounting for a U.S. firm after a merger. The
alternative is purchase accounting.

A pooling of interests is the method usually taken for all-stock deals.
poor: In poverty, which see.
Source: Blank, ITAN

Contexts: poverty
portmanteau test: a test for serial correlation in a time series, not just of one period back but of many.
Standard reference is Ljung and Box (1978). The equation characterizing this test is given on page 18,
footnote 15, of Bollerslev-Hodrick 1992 and will go in here when html has an equation format.
Source: Bollerslev-Hodrick 92 circa p 8

poverty: As commonly defined by U.S. researchers: the state of living in a family with income below
the federally defined poverty line.
Relevant terms: idle, poor, poverty, urban ghetto.
Source: Blank, ITAN

Contexts: data; poverty
power: "The power of a test statistic T is the probability that T will reject the null hypothesis when the
hypothesis is not true.
Formally, it is the probability that a draw of T is in the rejection region given that the hypothesis is not
true.

power distribution: A continuous distribution with a parameter that we will denote k. Pdf is kxk-1.
Mean is k/(k+1). Variance is k/[(1+k) 2(2+k)].
This distribution has not been found to correspond to natural or economic phenomena, but is useful in
practice problems because it is algebraically tractable.
Source: Hogg and Craig

PPF: Short for Production Possibilities Frontier.
PPP: Stands for purchasing power parity, a criterion for an appropriate exchange rate between
currencies. It is a rate such that a representative basket of goods in country A costs the same as in
country B if the currencies are exchanged at that rate.
Actual exchange rates vary from the PPP levels for various reasons, such as the demand for imports or
investments between countries.

Contexts: international
Prais-Winsten transformation: An improvement to the original Cochrane-Orcutt algorithm for

estimating time series regressions in the presence of autocorrelated errors. The implicit reference is to
Prais-Winsten (1954).
The Prais-Winsten tranformation makes it possible to include the first observation in the estimation.

pre-fisc: Means before taking account of the government's fiscal policy. Usually refers to personal
incomes before taxes and government transfers between people. For example a researcher might take
more interest in pre-fisc income inequality than in post-fisc income inequality because the effects of
government transfers are designed specifically to reduce inequality.
Contexts: public
precautionary savings: Savings accumulated by an agent to prepare for future periods in which the
agent's income is low.
precision: reciprocal of the variance
Source: Hamilton, p 355

predatory pricing: The practice of selling a product at low prices in order to drive competitors out,
discipline them, weaken them for possible mergers, and/or to prevent firms from entering the market. It
is an expensive strategy.
In the United States there is no legal (statutory) definition of predatory pricing, but pricing below
marginal cost (the Areeda-Turner test) has been used by the Supreme Court in 1993 as a criterion for
pricing that is predatory. (Salon magazine, 1998/11/11)
Contexts: IO
predetermined variables: Those that are known at the beginning of the current time period. In an
econometric model, means exogenous variables and lagged endogenous variables.
Source: Johnston, p 440

preferences: A property of the agents (individuals) in many economics models. The property is the
ability to compare any two bundles of goods and to prefer one over the other. Usually this ability is
presumed to be stable over time. The ability is presumed to be behind the observed behavior of
individuals who make choices, and we can then make theories about their preferences.
Preferences are often implicitly assumed to exist in a model by declaring that there is a utility function
characterizing the preferences of the agents in the model. A continuous utility function exists which

perfectly describes the preferences if the preferences are complete, reflexive, transitive, continuous, and
strongly monotonic.
[ed: yes, someday I will define those terms too.]
Standard disputes about models in which perfectly defined preferences exist are about whether the agent
is perfectly informed about the various bundles; about whether there are risks; and how stable over time
the preference relations (responses to comparisons) are.
Contexts: utility theory
present-oriented: A present-oriented agent discounts the future heavily and so has a HIGH discount
rate, or equivalently a LOW discount factor. See also 'future-oriented', 'discount rate', and 'discount
factor'.
Contexts: models
price ceiling: Law requiring that a price for a certain good be kept below some level. May lead to
shortage and a black market.
price complements: Two inputs i and j to a production function can be "price complements in
production". Assume the demand for the output is decreasing in its price. Inputs i and j are price
complements if when the price of i goes down the profit-maximizing use of both i and j go up.
Contexts: IO; labor
price elasticity: A measure of responsiveness of some other variable to a change in price. See elasticity
for the the general equation.
price floor: Law requiring that a price for a certain good be kept above some level.
price index: A single number summarizing price levels.
A larger number conventionally represents higher prices. A variety of algorithms are possible and a
precise specification (which is rare) requires both an algorithm (an example of which is a Laspeyres
index) and a set of goods, fixed known quantities of each (the basket),
Contexts: macro; price indexes
price substitutes: Inputs i and j to a production function are "price substitutes in production" if when
the price of i goes down the use of j goes up.
Contexts: IO; labor
pricing kernel: same as "stochastic discount factor" in a model of asset prices.
Source: Campbell, Lo, and MacKinlay p 294

Contexts: finance, macro
pricing schedule: A mapping from quantity purchased to total price paid
Contexts: IO
principal components: An approach to finding what mixture of underlying variables produces most of
the variation in the dependent variable.
For a more complete discussion see http://www.statsoftinc.com/textbook/stfacan.html
principal strip: A bond can be resold into parts that can be thought of as components: a principal
component that is the right to receive the principal at the end date, and the right to receive the coupon
payments. The components are called strips. The principal component is the principal strip.
principal-agent: The general name for a class of games faced by a player, called the principal, who by
the nature of the environment does not act directly but instead by giving incentives to other players,
called agents, who may have different interests.
Contexts: phrasing; game theory
principal-agent problem: A particular game-theoretic description of a situation. There is a player

called a principal, and one or more other players called agents with utility functions that are in some
sense different from the principal's. The principal can act more effectively through the agents than
directly, and must construct incentive schemes to get them to behave at least partly according to the
principal's interests. The principal-agent problem is that of designing the incentive scheme. The actions
of the agents may not be observable so it is not usually sufficient for the principal just to condition
payment on the actions of the agents.
principle of optimality: The basic principle of dynamic programming, which was developed by
Richard Bellman: that an optimal path has the property that whatever the initial conditions and control
variables (choices) over some initial period, the control (or decision variables) chosen over the
remaining period must be optimal for the remaining problem, with the state resulting from the early
decisions taken to be the initial condition.
Contexts: models
priori: Not used separately; see phrase a priori.
Contexts: phrases
Prisoner's Dilemma: A classic game with two players. Imagine that the two players are criminals being
interviewed separately by police. If either gives information to the police, the other will get a long
sentence. Either player can Cooperate (with the other player) or Defect (by giving information to the
police). Here is an example payoff matrix for a Prisoner's Dilemma game:

(D,D) is the Nash equilibrium, but (C,C) is the Pareto optimum. That Player Two
difference has been discussed extensively for various games in the research
C D
literature. Analogies to the prisoner's dilemma or some other game can
support an argument about why in the real world some Pareto optima are C 3,3 0,4
Player One
observed not to be achieved. D 4,0 1,1
If this same game is repeated more than once with a high enough discount factor, there exist Nash
equilibria in which (C,C) is a possible outcome of the early stages.
Source: Varian, 1992, Ch 15

pro forma: describes a presentation of data, typically financial statements, where the data reflect the
world on an 'as if' basis. That is, as if the state of the world were different from that which is in fact the
case. For example, a pro forma balance sheet might show the balance sheet as if a debt issue under
consideration had already been issued. A pro forma income statement might report the transactions of a
group on the basis that a subsidiary acquired partway through the reporting period had been a part of the
group for the whole period. This latter approach is often adopted in order to ensure comparability
between financial statements of the year of acquisition with those of subsequent years.
Source: Stephen Brown (stephenb@nwu.edu at the time) 7/24/2000, by email

Contexts: accounting; finance; business
probability:
Relevant terms: almost surely, convergence in quadratic mean, countable additivity property,
expectation, Fatou's lemma, Jensen's inequality, mixing, notation, strong law of large numbers, support.
Contexts: fields
probability function: synonym for pdf.
Source: Newey-McFadden, Ch 36, Handbook of Econometrics

probit model: An econometric model in which the dependent variable y i can be only one or zero, and
the continuous indepdendent variable xi are estimated in:
Pr(yi=1)=F(xi'b)
Here b is a parameter to be estimated, and F is the normal cdf. The logit model is the same but with a
different cdf for F.
process: see "stochastic process"
product differentiation: This is a product market concept. Chamberlin (1933) defined it thus: "A
general class of product is differentiated if any significant basis exists for distinguishing the goods of
one seller from those of another."

Source: Chamberlin, E. 1933. The Theory of Monopolistic Competition. Harvard University Press.
Cambridge, MA. 8th edition, 1962. as cited in: Brynjolfsson, Erik, Michael D. Smith, Yu (Jeffrey) Hu.
"Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety." p.6.
On the net as of Jan 7, 2003.
Contexts: IO
production function: Describes a mapping from quantities of inputs to quantities of an output as

generated by a production process. Standard example is:
y = f(x1, x2)
Where f() is the production function, the x's are inputs, and the y is an output quantity.
Contexts: micro
production possibilities frontier: A standard graph of the maximum amounts of two possible outputs
that can be made from a given list of input resources.
A basic outline of how to draw one.
production set: The set of possible input and output combinations. Often put into the notation of
netputs, so that this set can be defined by restrictions on a collection of vectors with the dimension of the
number of goods, one element for each kind of good, and a positive or negative real quantity in each
element.
productivity: A measure relating a quantity or quality of output to the inputs required to produce it.
Often means labor productivity, which is can be measured by quantity of output per time spent or
numbers employed. Could be measured in, for example, U.S. dollars per hour. For some more detail see
this site.
Contexts: macro
productivity paradox: Standard measures of labor productivity in the U.S. suggest that computers, at
least until 1995, were not improving productivity. The paradox is the question: why, then, were U.S.
employers investing more and more heavily in computers?
Resolving the paradox probably requires an understanding of the gap between what the productivity
statistics measure and the goals of the U.S. organizations getting computers. Sichel (1990), pp 33-36
lists these six:
 the mismanagement hypothesis is that computers underestimate the costs of new computer
technology, such as training, and therefore buy too many for optimum short-run profitability
 the redistribution hypothesis is that private rates of return on computers are high enough, but the
effect is only to compete over business with other firms in the same industry, which does not
overall show greater productivity; the analogy is to an arms race, in which both players invest
heavily but the overall effect is not to increase security

 the long learning-lags hypothesis is that information technology will generate a substantial
productivity effect when society is organized around its availability, but it is too soon for that
 the mismeasurement hypothesis is that national economic accounts do not tend to measure the
services brought by information technology such as quality, variety, customization, and
convenience
 the offsetting factors hypothesis is that other factors unrelated to computers have dragged down
productivity measures
 the small share of computers in the capital stock hypothesis is just that computers are too small a
share of plant and equipment to make a difference.
Two other hypotheses on this subject are:
 the externalities hypothesis is that computers in organization A improve the long-run productivity
of organization B but this is not attributable in the national accounts to the computers in A.
 the reorganization hypothesis is that computers in a firm do not raise much the quantity of capital
stock but they cause a more productive long run organization of the capital stock within that firm
and a more efficient split of tasks between that firm and other organizations.
Technophiles (such as this writer, or venture capitalists, or Silicon Valley publications) and technology
historians tend to believe in the long learning-lags hypothesis, the mismeasurement hypothesis, the
externalities/network-effects hypothesis, and the reorganization hypothesis. The gap in beliefs and
understandings between technophiles and national accounts and pricing experts, such as Sichel and
Robert J. Gordon (see e.g. the 1996 paper) is astonishing as of early 1999. They talk past one another.
The national accounts experts tend to take the labor/capital models more seriously, and technology
history less seriously, than do the technophiles. The Federal Reserve Bank under Greenspan has piloted
between these views.
Note, March 2002: The national accounts experts have come now to the view of the technophiles and it
is now commonly thought thtat the productivity measure lags the other indicators in the boom.
Source: Sichel, Daniel E. 1997. The computer revolution: an economic perspective. Brookings
Institution Press, Washington D.C.
Paul David, May 1990, American Economic Review, p 355.
Contexts: macro; technology
proof: A mathematical derivation from axioms, often in principle in the form of a sequence of
equations, each derived by a standard rule from the one above.
Contexts: mathematics; phrases; modelling
propensity score: An estimate of the probability that an observed entitiy like a person would undergo
the treatment. This probability is itself a predictor of outcomes sometimes.
Contexts: empirical
proper equilibrium: Any limit of epsilon-proper equilibria as epsilon goes to zero. -- Myerson (1978),
p 78
Source: Myerson, 1978, p 78, as cited by Pearce, 1984, p 1037


property income: Nominal revenues minus expenses for variable inputs including labor, purchased
materials, and purchased services. Property income can serve as an approximation to the services
rendered by capital. It contains the returns to national wealth. It can be thought to include technology
and organizational components as well as 'pure' returns to capital.
Source: Harper, 1999, p. 330

Contexts: macro; capital measurement
pseudoinverse: Also called Moore-Penrose inverse. The pseudoinverse of any matrix exists, is unique
and satisfies four conditions shown on p 37 of Greene (1993).
Perhaps the most important case is when the matrix X has more rows than columns, and X is of full
column rank. Then the pseudoinverse of X is: (X'X)-1X'. Notice how much this equation looks like the
equation for the OLS estimator.

PSID: Panel Study of Income Dynamics. Data set often used in labor economics studies. Data is from
U.S. and is put together at the University of Michigan.
Since 1968 the PSID has followed and interviewed annually a national sample that began with about
5000 families. Low-income families were over-sampled in the original design. Interviews are usually
conducted with the 'head' of each family.
Includes a lot of income and employment variables, and continues to track children who grow up and
move out. For more information see the PSID's Web site at http://www.isr.mich.edu/src /psid/index.html
public economics: A subfield that includes public goods and common pool resources, and public
finance meaning taxes and public borrowing and spending.
Source: fields
public finance:
Relevant terms: AGI, contingent valuation, embedding effect, existence value, Lerman ratio, Lucas
critique, nonuse value, SCF, Survey of Consumer Finances, Tobin tax.
Contexts: fields
purchase accounting: One of two ways to do the accounting for a U.S. firm after a merger. The
alternative is the pooling of interests.
put option: A put option is a security which conveys the right to sell a specified quantity of an
underlying asset at or before a fixed date.
put-call parity: A relationship between the price of a put option and a call option on a stock according
to a standard model.

Define:
r as the risk-free interest rate, constant over time, in an environment with no liquidity constraints
S as a stock's price
t as the current date
T as the expiration date of a put option and a call option
K as the strike price of the put option and call option
C(S,t) as the price of the call option when the current stock price is S and the current date is t
P(S,t) as the price of the put option when the current stock price is S and the current date is t
Then the relationship is:
P(S,t) = C(S,t) - S + Ke-r(T-t)
The relationship is derived from the fact that combinations of options can make portfolios that are
equivalent to holding the stock through time T, and that they must return exactly the same amount or an
arbitrage would be available to traders.
Contexts: finance
putting-out system: "A condition for the putting-out system to exist was for labor to be paid a piece
wage, since working at home made the monitoring of time impossible." -- Joel Mokyr, NU working
paper: "The rise and fall of the factory system: technology, firms, and households since the industrial
revolution" Carnegie-Rochester Conference on macreconomics, Nov 17-19, 2000.
Source: Joel Mokyr, NU working paper: "The rise and fall of the factory system: technology, firms, and
households since the industrial revolution" Carnegie-Rochester Conference on macreconomics, Nov 17-
19, 2000.
putty-putty: As in Romer, JPE, Oct 1990. This describes an attribute of capital in some models. Putty-
putty capital can be transformed into durable goods then back into general, flexible capital. This
contrasts with putty-clay capital which if I understand correctly can be converted into durable goods but
which cannot then be converted back into re-investable capital. The algebraic modeler chooses one of
these to make an argument or arrive at a conclusion within the model. The term is not normally
interpreted empirically although empirical analogues to each kind of capital exist.
Source: Romer, 1990

Q ratio: Or, "Tobin's Q". The ratio of the market value of a firm to the replacement cost of everything in
the firm. In Tobin's model this was the driving force behind investment decisions.
Q-statistic: Of Ljung-Box. A test for higher-order serial correlation in residuals from a regression.
Source: RATS manual, p. 1-15

Contexts: time series; estimation; econometrics
QJE: Quarterly Journal of Economics
Contexts: journals
QLR: quasi-likelihood ratio statistic

QML: Stands for quasi-maximum likelihood.
quango: Stands for quasi-non-governmental organization, such as the U.S. Federal Reserve. The term is
British.
Contexts: phrases
quantity theory of money: There are multiple versions and interpretations of quantity theories of
money. A central idea is that if there is more money in an economic system, prices will go up. Here,
money includes cash and various kinds of credit which serve as intermediaries in purchases.
A core basic expression of this theory is in an equation described by Patinkin (?) in Leeson(2003) as
cited by Samuels (2005). The quantity theory relates these variables:
- the quantity of money (M)
- its velocity (V) (that is the speed with which money changes hands on average)
- thus producing the aggregate demand for goods and services (MV)
- the price level (P)
- and the level of output of goods and services (T)
by this equation: MV=PT.
An implication of this construction is that the monetary authorities have some control over prices, in a
way that is not direct but through a whole system of purchases, production, and consumption.
Contexts: monetary
quartic kernel: The quartic kernel is this function: (15/16)(1-u2)2 for -1<u<1 and zero for u outside that
range. Here u=(x-xi)/h, where h is the window width and xi are the values of the independent variable in
the data, and x is the value of the independent variable for which one seeks an estimate.

quasi rents: returns in excess of the short-run opportunity cost of the resources devoted to the activity
Source: Jensen (86)

quasi-differencing: a process that makes GLS easier, computationally, in a fixed-effects kind of case.
One generates a (delta) with an equation [see B. Meyer's notes, installment 2, page 3] then subtracts
delta times the average of each individual's x from the list of x's, and delta times each individual's y from
the list of y's, and can run OLS on that. The calculation of delta requires some estimate of the
idiosyncratic (epsilon) error variance and the individual effects (mu) error variance.

quasi-hyperbolic discounting: A way of accounting in a model for the difference in the preferences an
agent has over consumption now versus consumption in the future.
Let b and d be scalar real parameters greater than zero and less than one. Events t periods in the future
are discounted by the factor bd t.
This formulation comes from a 1999 working paper of C. Harris and D. Laibson which cites Phelps and
Pollak (1968) and Zeckhauser and Fels (1968) for this function.
Contrast hyperbolic discounting, and see more information on discount rates at that entry.
Source: "Dynamic choices of hyperbolic consumers"", working paper by Christopher Harris and David
Laibson.
Contexts: models; macro; dynamic optimization
quasi-maximum likelihood: Often abbreviated QML. Maximum likelihood estimation can't be applied
to a econometric model which has no assumption about error distributions, and may be difficult if the
model has assumptions about error distributions but the errors are not normally distributed. Quasi-
maximum likelihood is maximum likelihood applied to such a model with the alteration that errors are
presumed to be drawn from a normal distribution. QML can often make consistent estimates.
QML estimators converge to what can be called a quasi-true estimate; they have a quasi-score function
which produces quasi-scores, and a quasi-information matrix. Each has maximum likelihood analogues.
quasiconcave: A function f(x) mapping from the reals to the reals is quasiconcave if it is nondecreasing
for all values of x below some x0 and nonincreasing for all values of x above x0. x0 can be infinity or
negative infinity: that is, a function that is everywhere nonincreasing or nondecreasing is quasiconcave.
Quasiconcave functions have the property that for any two points in the domain, say x 1 and x2, the value
of f(x) on all points between them satisfies:
f(x) >= min{f(x1), f(x2)}.
Equivalently, f() is quasiconcave iff -f() is quasiconvex.
Equivalently, f() is quasiconcave iff for any constant real k, the set of values x in the domain of f() for
which f(x) >= k is a convex set.
The most common use in economics is to say that a utility function is quasiconcave, meaning that in the
relevant range it is nondecreasing.
A function that is concave over some domain is also quasiconcave over that domain. (Proven in Chiang,
p 390).
A strictly quasiconcave utility function is equivalent to a strictly convex set of preferences, according to
Brad Heim and Bruce Meyer (2001) p. 17.

Source: Simon and Blume, Chiang, pp 387-399

quasiconvex: A function f(x) mapping from the reals to the reals is quasiconvex if it is nonincreasing
for all values of x below some x0 and nondecreasing for all values of x above x 0. x0 can be infinity or
negative infinity: that is, a function that is everywhere nonincreasing or nondecreasing is quasiconvex.
Quasiconvex functions have the property that for any two points in the domain, say x 1 and x2, the value
of f(x) on all points between them satisfies:
f(x) <= max{f(x1), f(x2)}.
Equivalently, f() is quasiconvex iff -f() is quasiconcave.
Equivalently, f() is quasiconvex iff for any constant real k, the set of values x in the domain of f() for
which f(x) <= k is a convex set.
A function that is convex over some domain is also quasiconvex over that domain. (Proven in Chiang, p
390).
Source: Simon and Blume, Chiang, pp 387-399

quasilinear: A utility function U() is quasilinear in one of its arguments, c, if a monotonic

transformation of U() has this form for some v():
U(c,x1,x2,...xk) = c + v(x1,x2,...xk)
[ed: Your editor no longer recalls why one would care if a utility function has this property or not.]
Contexts: models; utility
R&D intensity: Sometimes defined to be the ratio of expenditures by a firm on research and
development to the firm's sales.
Source: Levin, Richard C., Alvin K. Klevorick, Richard R. Nelson, Sidney G. Winter. 1987.
"Appropriating the Returns from Industrial Research and Development." Brookings Papers on
Economic Activity, voume 1987, issue 3. pp 783-820. (see p. 812 for the definition of this term.)
R-squared: Usually written R2. Is the square of the correlation coefficient between the dependent
variable and the estimate of it produced by the regressors, or equivalently defined as the ratio of
regression variance to total variance.
Source: Kennedy, 1992; Greene, 1993, p 72

Ramsey equilibrium: Results from a government's choice in certain kinds of models. Suppose that the
government knows how private sector producers will respond to any economic environment, and that
the government moves first, choosing some aspect of the environment. Suppose further that the

government makes its choice in order to maximize a utility function for the population. Then the
government's choice is a Ramsey problem and its solution pays off with the Ramsey outcome.
Contexts: macro
Ramsey outcome: The payoffs from a Ramsey equilibrium.
Contexts: macro
Ramsey problem: See Ramsey equilibrium.
random: Not completely predetermined by the other variables available.
Examples: Consider the function plus(x,y) which we define to have the value x+y. Every time one
applies this function to a given x and y, it would give the same answer. Such a function is deterministic,
that is, nonrandom.
Consider by contrast the function N(0,1) which we define to give back a draw from a standard normal
distribution. This function does not return the same value every time, even when given the same
parameters, 0 and 1. Such a function is random, or stochastic.
Contexts: statistics; econometrics; time series
random effects estimation: The GLS procedure in the context of panel data.
Fixed effects and random effects are forms of linear regression whose understanding presupposes an
understanding of OLS.
In a fixed effects regression specification there is a binary variable (also called dummy or indicator
variable) marking cross section units and/or time periods. If there is a constant in the regression, one
cross section unit must not have its own binary variable marking it.
From Kennedy, 1992, p. 222:

"In the random effects model there is an overall intercept and an error term with two components: e it +
ui. The eit is the traditional error term unique to each observation. The u i is an error term representing
the extent to which the intercept of the ith cross-sectional unit differs from the overall intercept. . . . .
This composite error term is seen to have a particular type of nonsphericalness that can be estimated,
allowing the use of EGLS for estimation. Which of the fixed effects and the random effects models is
better? This depends on the context of the data and for what the results are to be used. If the data exhaust
the population (say observations on all firms producing automobiles), then the fixed effects approach,
which produces results conditional on the units in the data set, is reasonable. If the data are a drawing of
observations from a large population (say a thousand individuals in a city many times that size), and we
wish to draw inferences regarding other members of that population, the fixed effects model is no longer
reasonable; in this context, use of the random effects model has the advantage that it saves a lot of
degrees of freedom. The random effects model has a major drawback, however: it assumes that the
random error associated with each cross-section unit is uncorrelated with the other regressors, something
that is not likely to be the case. Suppose, for example, that wages are being regressed on schooling for a
large set of individuals, and that a missing variable, ability, is thought to affect the intercept; since
schooling and ability are likely to be correlated, modeling this as a random effect will create correlation

between the error and the regressor schooling (whereas modeling it as a fixed effect will not). The result
is bias in the coefficient estimates from the random effect model."
[Kennedy asserts, then, that fixed and random effects often produce very different slope coefficients.]
The Hausman test is one way to distinguish which one makes sense.
Source: Kennedy, 1992

random process: Synonym for stochastic process.
Contexts: statistics; models; econometrics; time series
random variable: A nondeterministic function. See random.
random walk: A random walk is a random process yt like:

yt=+yt-1+et
where  is a constant (the trend, often zero) and e t is white noise.
A random walk has infinite variance and a unit root.

Contexts: econometrics; statistics; time series; models
Rao-Cramer inequality: defines the Cramer-Rao lower bound, which see. (would like to put equation
from Hogg and Craig p 372 here)
Source: Hogg and Craig p 372

rational: An adjective. Has several definitions.:

(1) characterizing behavior that purposefully chooses means to achieve ends (as in Landes, 1969/1993, p
21).
(2) characterizing preferences which are complete and transitive, and therefore can be represented by a
utility function (e.g. Mas-Coleil).
(3) characterizing a thought process based on reason; sane; logical. Can be used in regard to behavior.
(e.g. American Heritage Dictionary, p 1028)
Contexts: phrases; modelling
rational expectations: An assumption in a model: that the agent under study uses a forecasting
mechanism that is as good as is possible given the stochastic processes and information available to the
agent.
Often in essence the rational expectations assumption is that the agent knows the model, and fails to

make absolutely correct forecasts only because of the inherent randomness in the economic
environment.
Contexts: macro
rational ignorance: The option of an agent not to acquire or process information about some realm.
Ordinarily used to describe a citizen's choice not to pay attention to political issues or information,
because paying attention has costs in time and effort, and the effect a citizen would have by voting per
se is usually zero.
Source: Downs (1957): An economic theory of democracy, according to G.Miller, "The impact of
economics on contemporary political science", Sept 1997 JEL.
Contexts: phrases; political
rationalizable: In a noncooperative game, a strategy of player i is rationalizable iff it is a best response

to a possible set of actions of the other players, where those actions are best responses given beliefs that
those other players might have.
By rationalizable we mean that i's strategy can be justified in terms of the other players choosing best
responses to some beliefs (subjective probability distributions) that they may be conjectured to have.
Nash strategies are rationalizable.
Source: Bernheim, 1984, p 1014

rationalize: verb, meaning: to take an observed or conjectured behavior and find a model environment
in which that behavior is an optimal solution to an optimization problem.
Contexts: phrases; modelling
RATS: A computer program for the statistical analysis of data, especially time series. Name stands for
Regression Analysis of Time Series. First chapter of its manual has a nice tutorial.
The software is made by Estima Corp.
Contexts: data; estimation; code
RBC: stands for Real Business Cycle (which see) -- a class of macro theories
real analysis:
Relevant terms: affine, B1, Banach space, Borel set, Borel sigma-algebra, Cauchy sequence, compact,
convolution, even function, extended reals, Frechet derivative, Frechet differentiable, functional, Hilbert
space, Holder continuous, inf, L, L, L, Lipschitz condition, Lipschitz continuous, lower hemicontinuous,
measurable, measurable space, measure, narrow topology, quasiconcave, quasiconvex, Riemann-
Stieltjes integral, sigma-algebra, sup, topological space, topology, upper hemicontinuous, Weierstrauss
Theorem.

Contexts: fields
real bills doctrine: In the Great Depression of the 1930s, the Federal Reserve did not provide sufficient
money to prevent a series of banking panics. "The Fed erred, says Meltzer, because it followed a theory
(named 'real bills') that called for it to create money only in response to higher loan demand; because
loan demand had collapsed, the Fed was too passive." from "Greenspan's Finest Hour?" by Robert J.
Samuelson, published in the Dec 15, 2003 Newsweek, page 39, which cites Allan Meltzer's book A
History of the Federal Reserve.
Source: from "Greenspan's Finest Hour?" by Robert J. Samuelson, published in the Dec 15, 2003
Newsweek, page 39, which cites Allan Meltzer's book A History of the Federal Reserve.
Contexts: monetary; economic history
real business cycle theory: A class of theories explored first by John Muth (1961), and associated most
with Robert Lucas. The idea is to study business cycles with the assumption that they were driven
entirely by technology shocks rather than by monetary shocks or changes in expectations.
Shocks in government purchases are another kind of shock that can appear in a pure real business cycle
(RBC) model. Romer, 1996, p 151
Source: Among others: Romer, 1996, p 151

real externality: An effect of production or transactions on outside parties that affects something
entering their production or utility functions directly.
Contexts: general equilibrium
recession: A recession is defined to be a period of two quarters of negative GDP growth.
Thus: a recession is a national or world event, by definition. And statistical aberrations or one-time
events can almost never create a recession; e.g. if there were to be movement of economic activity
(measured or real) around Jan 1, 2000, it could create the appearance of only one quarter of negative
growth. For a recession to occur the real economy must decline.
Contexts: macro
reduced form: The reduced form of an econometric model has been rearranged algebraically so that
each endogenous variable is on the left side of one equation, and only predetermined variables
(exogenous variables and lagged endogenous variables) are on the right side.
Source: Johnston, p 440

regression function: A regression function describes the relationship between dependent variable Y and
explanatory variable(s) X. One might estimate the regression function m() in the econometric model
Yi = m(Xi) + ei
where the ei are the residuals or errors. As presented that is a nonparametric or semiparametric model,
with few assumptions about m(). If one were to assume also that m(X) is linear in X one would get to a
standard linear regression model:

Yi = (Xi)b + ei
where the vector b could be estimated.

regrettables: consumption items that to not directly produce utility, such as health maintenance,
transportation to work, and "waiting times"
Source: Glen Cain, Handbook article

Contexts: labor
Regulation Q: A U.S. Federal Reserve System rule limiting the interest rates that U.S. banks and
savings and loan institutions could pay on deposits.

Contexts: history; IO
reinsurance: Insurance purchased by an insurer, often to protect against especially large risks or risks
correlated to other risks the insurer faces.
Contexts: business
rejection region: In hypothesis testing. Let T be a test statistic. Possible values of T can be divided into
two regions, the acceptance region and the rejection region. If the value of T comes out to be in the
acceptance region, the null hypothesis H0 (the set of restrictions being tested) is accepted, or at any rate
not rejected. If T falls in the rejection region, the null hypothesis is rejected.
The terms 'acceptance region' and 'rejection region' may also refer to the subsets of the sample space that
would produce statistics T that go into the acceptance region or rejection region as defined above.

rent-seeking: Rent-seeking means a search for extraordinary profits, beyond the normal returns to
investment. It often implies putting someone else at a disadvantage. See rents and quasi-rents.
rents: Rents are returns in excess of the opportunity cost of the resources devoted to the activity.
Source: Jensen (86)

resale price maintenance: The effect of rules imposed by a manufacturer on wholesale or retail
resellers of its own products, to prevent them from competing too fiercely on price and thus driving
profits down from the reselling activity. The manufacturer may do this because it wishes to keep
resellers profitable. Such contract provisions are usually legal under US law but have not always been
allowed since they formally restrict free trade.
With thanks to: Jonathan G. Powers (jgp423@northwestern.edu as of 12 July 2000)

Contexts: industrial organization
reservation wage property: A model has the reservation wage property if agents seeking employment
in the model accept all jobs paying wages above some fixed value and reject all jobs paying less.
residual claimant: The agent who receives the remainder of a random amount once predictable
payments are made.
The most common example: consider a firm with revenues, suppliers, and holders of bonds it has issued,
and stockholders. The suppliers receive the predictable amount they are owed. The bondholders receive
a predictable payout -- the debt, plus interest. The stockholders can claim the residual, that is, the
amount left over. It may be a negative amount, but it may be large. The same idea of a residual claimant
can be applied in analyzing other contracts. There is a historical link to theories about wages; see
http://britannica.com/bcom/eb/article/9/0,5716,109009+6+106209,00.html
Contexts: corporate finance
resiliency: An attribute of a market.
In securities markets, depth is measured by "the speed with which prices recover from a random,
uninformative shock." (Kyle, 1985, p 1316).

Contexts: finance
ReStat: An abbrevation for the Review of Economics and Statistics.
Contexts: journals
restricted estimate: An estimate of parameters taken with the added requirement that some particular
hypothesis about the parameters is true. Note that the variance of a restricted estimated can never be as
low as that of an unrestricted estimate.
restriction: assumption about parameters in a model
ReStud: An abbreviation for the journal Review of Economic Studies.
Contexts: journals
revelation principle: That truth-telling, direct revelation mechanisms can generally be designed to
achieve the Nash equilibrium outcome of other mechanisms; this can be proven in a large category of
mechanism design cases.
Relevant to a modelling (that is, theoretical) context with:

-- two players, usually firms

-- a third party (usually the government) managing a mechanism to achieve a desirable social outcome
-- incomplete information -- in particular, the players have types that are hidden from the other player
and from the government.
Generally a direct revelation mechanism (that is, one in which the strategies are just the types a player
can reveal about himself) in which telling the truth is a Nash equilibrium outcome can be proven to exist
and be equivalent to any other mechanism available to the government. That is the revelation principle.
It is used most often to prove something about the whole class of mechanism equilibria, by selecting the
simple direct revelation mechanism, proving a result about that, and applying the revelation principle to
assert that the result is true for all mechanisms in that context.
Source: Kreps, 1990, p 691, 694

Ricardian proposition: that tax financing and bond financing of a given stream of government
expenditures lead to equivalent allocations. This is the Modigliani-Miller theorem applied to the
government.
ridit scoring: A way of recoding variables in a data set so that one has a measure not of their absolute
values but their positions in the distribution of observed values. Defined in this broadcast to the list of
Stata users:
Date: Sat, 20 Feb 1999 14:13:35 +0000

From: Ronan Conroy
Subject: Re: statalist: Standardizing Variables
Paul Turner said (19/2/99 9:54 pm)
>I have two variables--X1 and X2--measured on ordinal scales. X1 ranges

>from 0 to 10; X2 ranges from 0 to 12. What I want to do is to standardize
>X1 and X2 to a common metric in order to explore how differences between
>the two affect the dependent variable of interest. Converting values to
>percentages of the maximum values (10 and 12) is the first approach that
>occurs to me, but I don't know if there's something I'm forgetting
This sort of thing is possible, and called ridit scoring. You replace
each of the original scale points with the percentage (or proportion) of
the sample who scored at or below that value. This gives the scales a
common interpretation as percentiles of the sample, and means that they
are now expressed on an interval metric, though the data are still grainy.
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
_/_/_/ _/_/ _/_/_/ _/ Ronan M Conroy

_/ _/ _/ _/ _/ _/ Lecturer in Biostatistics
_/_/_/ _/ _/_/_/ _/ Royal College of Surgeons
_/ _/ _/ _/ _/ Dublin 2, Ireland
_/ _/ _/_/ _/_/_/ _/ voice +353 1 402 2431
rconroy@rcsi.ie fax +353 1 402 2329
_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
I'm not an outlier; I just haven't found my distribution yet

Source: Ronan Conroy (rconroy@rcsi.ie)

Riemann-Stieltjes integral: A generalization of regular Riemann integration.
Let | denote the integral sign. Quoting from Priestly:
"...when we have two deterministic functions g(t),F(t), the Riemann-Stieltjes integral

R = |ab g(t)dF(t)
is defined as the limiting value of the discrete summation"
(sum from i=1 to i=n of) g(ti)[F(ti)-F(ti-1)]
for t1=a and tn=b as n goes to infinity and "as max(t i-ti-1)->0."
If F(t) is differentiable, then the above integral is the same as the regular integral R=|ab g(t)F'(t) dt, but
the Reimann-Stieltjes integral can be defined in many cases even when F() is not differentiable.
One of the most common uses is when F() is a cdf.
Examples: The expectation of a random variable can be written:

mu=| xf(x) dx
if f(x) is the pdf. It can also be written:
mu=| x dF(x)
where F(x) is the cdf. The two are equivalent for a continuous distribution, but notice that for a discrete
one (e.g. a coin flip, with X=0 for heads and X=1 for tails) the second, Riemann-Stieltjes, formulation is
well defined but no pdf exists to calculate the first one.
Source: Priestly, 1981, 1994, p 155

Contexts: econometrics; time series; real analysis; statistics
risk: If outcomes will occur with known or estimable probability the decisionmaker faces a risk.
Certainty is a special case of risk in which this probability is equal to zero or one. Contrast uncertainty.

Contexts: models
risk free rate puzzle: See equity premium puzzle.
Contexts: finance; macro; phrases
RJE: An abbreviation for the RAND Journal of Economics, which was previously called the Bell
Journal of Economics.
Contexts: journals
RMPY: Stands for a standard VAR run on standard data, with interest rates (R), money stock (M),
inflation (P), and output (Y). In Faust and Irons (1996), these are operationalized by the three-month
Treasury bill rate, M2, the CPI, and the GNP.

Source: Jon Faust and John Irons (1996), "Money, politics, and the post-War business cycle"
Contexts: macro
Robinson-Patman Act: U.S. legislation of 1936 which made rules against price discrimination by
firms. Agitation by small grocers was a principal cause of the law. They were under competitive
pressure and displaced by the arrival of chain stores. The Act is thought by many to have prevented
reasonable price competition, since it made many pricing actions illegal per se. For many of its
provisions, 'good faith' was not a permitted defense. So it can be argued that it was confusing, vague,
unnecessarily restrictive, and designed to prevent some competitors in retailing from being driven out
rather than to further social welfare generally, e.g. by allowing pricing decisions that would benefit
consumers. Other causes: glitches in an earlier law, the Clayton Act.
Contexts: IO; history
robust smoother: A robust smoother is a smoother (an estimator of a regression function) that gives
lower weights to datapoints that are outliers in the y-direction.

Roll critique: That the CAPM may appear to be rejected in tests not because it is wrong but because the
proxies for the market return are not close enough to the true market portfolio available to investors.
Contexts: finance
roughness penalty: A loss function that one might incorporate into an estimate of a function to prevent
the estimated function from matching the data closely but at the cost of jerkiness. See 'spline smoothing'
and 'cubic spline' for example uses.
An example roughness penalty would be LI[m"(u)]2du, where L is a 'smoothing parameter', I stands for
the integral sign, m"() is the second derivative of the estimated function, and u is a dummy variable that
ranges over the domain of the estimated function.
Source: Hardle, 1990, circa page 56

Rybczynski theorem: Paraphrasing from Hanson and Slaughter (1999): In the context of a Heckscher-
Ohlin model of international trade, open trade between regions means changes in relative factor supplies
between regions can lead to an adjustment in quantities and types of outputs between regions that would
return the system toward equality of production input prices like wages across countries (the state of
factor price equalization).
Such theorems are named this way by analogy to Rybczynski (1955), and refer to that part of the
mechanism that has to do with output adjustments.
Source: Hanson, Gordon H., and Matthew J. Slaughter, "The Rybczinski theorem, factor-price
equalization, and immigration: evidence from U.S. states," NBER working paper 7074, April 1999. On
Web at http://www.nber.org/papers/w7074
Rybczynski, T.M. 1955. "Factor endowments and relative commodity prices." Economica 22: 336-341.
S-Plus: Statistical software published by Mathsoft.

s.t.: An abbreviation meaning "subject to" or "such that", where constraints follow.
In a common usage:
maxx f(x) s.t. g(x)=0
The above expression, in words, means: "The value of f(x) that is greatest among all those for which the
argument x satisfies the constraint that g(x)=0." (Here f() and g() are fixed, possibly known, real-valued
functions of x.)
Contexts: notation
saddle point: In a second-order [linear difference equation] system, ... if one root has absolute value
greater than one, and the other root has absolute value less than one, then the steady state of the system
is called a saddle point. In this case, the system is unstable for almost all initial conditions. The
exception is the set of initial conditions that begin on the eigenvector associated with the stable
eigenvalue.
Source: Farmer, p. 30
Contexts: macro; dynamical systems; models
Sargan test: A test of the validity of instrumental variables. It is a test of the overidentifying
restrictions. The hypothesis being tested is that the instrumental variables are uncorrelated to some set of
residuals, and therefore they are acceptable, healthy, instruments.
If the null hypothesis is confirmed statistically (that is, not rejected), the instruments pass the test; they
are valid by this criterion.
In the Shi and Svensson working paper (which shows that elected national governments in 1975-1995
had larger fiscal deficits in election years, especially in developing countries), the Sargan statistic was
asymptotically distributed chi-squared if the null hypothesis were true.
See test of identifying restrictions, which is not exactly the same thing, I think.
Source: Shi and Svensson; Harvard University working paper circa 2000
SAS: Statistical analysis software. SAS web site
scale economies: Same as economies of scale.
scatter diagram: A graph of unconnected points of data. If there are many of them the result may be
'clouds' of data which are hard to interpret; in such a case one might want to use a nonparametric
technique to estimate a regression function.


scedastic function: Given an independent variable x and a dependent variable y, the scedastic function
is the conditional variance of y given x. That variance of the conditional distribution is:
var[y|x] = E[(y-E[y|x])2|x]
= integral or sum of (y-E[y|x])2f(y|x) dy

= E[y2|x] - (E[y|x])2.
Source: Greene, 1993, pp 68-69

SCF: Stands for Survey of Consumer Finances.
Schumpeterian growth: Paraphrasing from Mokyr (1990): Schumpeterian growth of economic growth
brought about by increase in knowledge, most of which is called technological progress.
Source: Mokyr, 1990, p. 4-6

Schwarz Criterion: A criterion for selecting among formal econometric models. The Schwarz Criterion
is a number:
T ln (RSS) + K ln(T)
The criterion is minimized over choices of K to form a tradeoff between the fit of the model (which
lowers the sum of squared residuals) and the model's complexity, which is measured by K. Thus an AR
(K) model versus an AR(K+1) can be compared by this criterion for a given batch of data.
Source: RATS maual pg. 5-18

Contexts: econometrics; time series; models
Scitovsky paradox: The problem that some ways of aggregating social welfare may make it possible
that a switch from allocation A to allocation B seems like an improvement in social welfare, but so does
a move back. (An example may be Condorcet's voting paradox.)
Scitovsky, T., 1941, "A Note on Welfare Propositions in Economics", Review of Economic Studies, Vol
9, Nov 1941, pp 77-88.
The Scitovsky criterion (for a social welfare function?) is that the Scitovsky paradox not exist.
Source: Boadway 1974; Scitovsky

Contexts: public
score: In maximum likelihood estimation, the score vector is the gradient of the likelihood function with
respect to the parameters. So it has the same number of elements as the parameter vector does (often

denoted k). The score is a random variable; it's a function of the data. It has expectation zero, and is set
to zero exactly for a given sample in the maximum likelihood estimation process.
Denoting the score as S(), and the likelihood function as L(), where in both cases the data are also
implied arguments:
S() = dL()/d()
Example: In OLS regression of Yt=Xt+et, the score for each possible parameter value, , is Xt'et().
The variance of the score is E[score2]-(E[score])2) which is E[score2] since E[score] is zero. E[score2] is
also called the information matrix and is denoted I().
screening game: A game in which an uninformed player offers a menu of choices to the player with
private information (the informed player). The selection of the elements of that menu (which might be,
for example, employment contracts containing pairs of pay rates and working hours) is a choice for the
uninformed player to optimize on the basis of expectations about they possible types of the informed
player.
second moment: The second moment of a random variable is the expected value of the square of the
draw of the random variable. That is, the second moment is EX 2. Same as 'uncentered second moment'
as distinguished from the variance which is the 'centered second moment.'
Second Welfare Theorem: A Pareto efficient allocation can be achieved by a Walrasian equilibrium if
every agent has a positive quantity of every good, and preferences are convex, continuous, and strictly
increasing.
(My best understanding of 'convex preferences' is that it means 'concave utility function'.)
secular: an adjective meaning "long term" as in the phrase "secular trends." Outside the research context
its more common meaning is 'not religious'.
seigniorage: Alternate spelling for seignorage.
seignorage: "The amount of real purchasing power that [a] government can extract from the public by
printing money."" -- Cukierman 1992
Explanation: When a government prints money, it is in essence borrowing interest-free since it receives
goods in exchange for the money, and must accept the money in return only at some future time. It gains
further if issuing new money reduces (through inflation) the value of old money by reducing the liability
that the old money represents. These gains to a money-issuing government are called "seignorage"
revenues.

The original meaning of seignorage was the fee taken by a money issuer (a government) for the cost of
minting the money. Money itself, at that time, was intrinsically valuable because it was made of metal.
Source: Cukierman, 1992

Contexts: money
self-generating: Given an operator B() that operates on sets, a set W is self-generating if W is contained
in B(W).
This definition is in Sargent (98) and may come from Abreu, Pearce, and Stacchetti (1990).
semi-nonparametric: synonym for semiparametric.
semi-strong form: Can refer to the semi-strong form of the efficient markets hypothesis, which is that
any public information about a security is fully reflected in its current price.
Fama (1991) says that a more common and current name for tests of the semi-strong form hypothesis is
'event studies.'
Source: Fama, 1970, p 404

Contexts: finance
semilog: The semilog equation is an econometric model:
Y = ea+bX+e
or equivalently
ln Y = a + bX + e
Commonly used to describe exponential growth curves. (Greene 1993, p 239)

semiparametric: An adjective that describes an econometric model with some components that are
unknown functions, while others are specified as unknown finite dimensional parameters.
An example is the partially linear model.

senior: Debts may vary in the order in which they must legally be paid in the event of bankruptcy of the
individual or firm that owes the debt. The debts that must be paid first are said to be senior debts.
Contexts: finance

SES: socioeconomic status
Contexts: labor; sociology
shadow price: In the context of a maximization problem with a constraint, the shadow price on the
constrain is the amount that the objective function of the maximization would increase by if the
constraint were relaxed by one unit.
The value of a Lagrangian multiplier is a shadow price.
This is a striking and useful fact, but takes some practice to understand.
Source: Layard and Glaister, p 8
shakeout: A period when the failure rate or exit rate of firms from an industry is unusually high.
Source: Philip Anderson and Michael L. Tushman, Research-Technology Management, May/June 1991,
pp. 26-31.
Contexts: IO; business history
sharing rule: A function that defines the split of gains between a principal and agent. The gains are
usually profits, and the split is usually a linear rule that gives a fraction to the agent. For example,
suppose profits are x, which might be a random variable. The principal and agent might agree, in
advance of knowing x, on a sharing rule s(x). Here s(x) is the amount given to the agent, leaving the
principal with the residual gain x-s(x).
Source: very roughly taken from Holmstrom (82)

Contexts: game theory; micro theory; models
Sharpe ratio: Computed in context of the Sharpe-Linter CAPM. Defined for an asset portfolio a that
has mean a, standard deviation a, and with risk-free rate rf by:
[a-rf]/a
Higher Sharpe ratios are more desirable to the investor in this model.
The Sharpe ratio is a synonym for the "market price of risk." Empirically, for the NYSE, the Sharpe
ratio is in the range of .30 to .40.
Contexts: finance
SHAZAM: Econometric software published at the University of British Columbia. See

http://shazam.econ.ubc.ca.
Shephard's lemma:
Source: Shephard (1953) cited in Zegeye (2001)
Sherman Act: 1890 U.S. antitrust law. It has been described as vague, leading to ambiguous

interpretations over the years.

Section one of the law forbids certain joint actions: "Every contract, combination in the form of trust or
otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign
nations, is hereby declared illegal...."
Section two of the law forbids certain individual actions: "Every person who shall monopolize, or
attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part
of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a
felony..."
The reasons for the passage of the Sherman Act:
(1) To promote competition to benefit consumers,
(2) Concern for injured competitors,
(3) Distrust of concentration of power.
short rate: Abbreviation for 'short term interest rate'; that is, the interest rate charged (usually in some
particular market) for short term loans.
Contexts: finance
Shubik model: A theoretical model designed to study the behavior of money. There are N goods traded
in N(N-1) markets, one for each possible combination of good i and good j that could be exchanged.
One assumes that only N of these markets are open; that good 0, acting as money, is traded for each of
the other commodities but they are not exchanged for one another. Then one can study the behavior of
the money good.
SIC: Standard Industrial Classification code -- a four-digit number assigned to U.S. industries and their
products. By "two-digit industries" we mean a coarser categorization, grouping the industries whose first
two digits are the same.
Contexts: IO; data
sieve estimators: flexible basis functions to approximate a function being estimated. It may be that
orthogonal series, splines, and neural networks are examples. Donald (1997) and Gallant and Nychka
(1987) may have more information.
Source: Chen, Xiaohong, and Timothy G. Conley, &A semiparametric spatial model for panel time
series" Preliminary Northwestern University working paper, January 1999.
Donald, Stephen G. 1997. "Inference concerning the number of factors in a multivariate nonparametric
relationship" Econometrica 65:103-132.
Gallant, A.R. and Nychka, D. 1987. "Semi-non-parametric maximum likelihood estimation"
Econometrica 55:363-390.
sigma-algebra: A collection of sets that satisfy certain properties with respect to their union.
(Intuitively, the collection must include any result of complementations, unions, and intersections of its

elements. The effect is to define properties of a collection of sets such that one can define probability on
them in a consistent way.) Formally:
Let S be a set and A be a collection of subsets of S. A is a sigma-algebra of S if:
(i) the null set and S itself are members of A
(ii) the complement of any set in A is also in A
(iii) countable unions of sets in A are also in A.
It follows from these that a sigma-algebra is closed under countable complementation, unions, and
intersections.
signaling game: A game in which a player with private information (the informed player) sends a signal
of his private type to the uninformed player before the uninformed player makes a choice. An example:
a candidate worker might suggest to the potential employer what wage is appropriate for himself in a
negotiation.
significance: A finding in economics may be said to be of economic significance (or substantive

significance) if it shows a theory to be useful or not useful, or if has implications for scientific
interpretation or policy practice (McCloskey and Ziliak, 1996). Statistical significance is property of the
probability that a given finding was produced by a stated model but at random: see significance level.
These meanings are different but sometimes overlap. McCloskey and Ziliak (1996) have a substantial
discussion of them. Ambiguity is common in practice, but not hard to avoid. (Editorial comment
follows.) When the second meaning is intended, use the phrase "statistically significant" and refer to a
level of statistical significance or a p-value. Avoid the aggressive word "insignificant" unless it is clear
whether the word is to be taken to mean substantively insignificant or not statistically significant.
Source: McCloskey, Deirdre N., and Stephen T. Ziliak. "The standard error of regressions," Journal of
Economic Literature vol XXXIV (March 1996), pp 97-114.
Contexts: phrases; statistics; econometrics; estimation
significance level: The significance level of a test is the probability that the test statistic will reject the
null hypothesis when the [hypothesis] is true. Significance is a property of the distribution of a test
statistic, not of any particular draw of the statistic.
Synonymous with statistical 'size' of a test.

simulated annealing: A method of finding optimal values numerically. Simulated annealing is a search
method as opposed to a gradient based algorithm. It chooses a new point, and (for optimization) all
uphill points are accepted while some downhill points are accepted depending on a probabilistic criteria.
Unlike the simplex search method provided by Matlab, simulated annealing may allow "bad" moves
thereby allowing for escape from a local max. The value of a move is evaluated according to a
temperature criteria (which essentially determines whether the algorithm is in an "hot" area of the
function).

Source: Mark Manuszak (as of 5/25/99, mdm080@nwu.edu of Northwestern Univ); Matlab

documentation
Contexts: optimization; estimation; numerical techniques
simultaneous equation system: By "system" is meant that there are multiple, related, estimable
equations. By simultaneous is meant that two quantities are jointly determined at time t by one another's
values at time t-1 and possibly at t also.
Example, from Greene, (1993, p. 579), of market equilibrium:
qd=a1p+a2+ed (Demand equation)

qs=b1p+es (Supply equation)
qd=qs=q
Here the quantity supplied is q s, quantity demanded is qd, price is p, the e's are errors or residuals, and
the a's and b's are parameters to be estimated. We have data on p and q, and the quantities supplied and
demanded are conjectural.
single-crossing property: Distributions with cdfs F and G satisfy the single-crossing property if there is
an x0 such that: F(x) >= G(x) for x<=x0 and G(x) >= F(x) for x>=x0
sink: "In a second-order [linear difference equation] system, if both roots are positive and less than one,
then the system converges monotonically to the steady state. If the roots are complex and lie inside the
unit circle then the system spirals into the steady state. If at least one root is negative, but both roots are
less than one in absolute value, then the system will flip from one side of the steady state to the other as
it converges. In all of these cases the steady state is called a sink." Contrast 'source'.
SIPP: The U.S. Survey of Income and Program Participation, which is conducted by the U.S. Census
Bureau.
A tutorial is at: http://www.bls.census.gov/sipp/tutorial/SIPP_Tutorial_Beta_version/LAUNCHtutor

ial.html
Source: http://www.sipp.census.gov/sipp
With thanks to: Dan Levy
Contexts: data
size: A synonym for significance level.


skewness: An attribute of a distribution. A distribution that is symmetric around its mean has skewness
zero, and is 'not skewed'. Skewness is calculated as E[(x-mu)3]/s3 where mu is the mean and s is the
standard deviation.
Source: Hogg and Craig, p 57

skill: In regular English usage means "proficiency". Sometimes used in economics papers to represent
the experience and formal education. (Ed.: in this editor's opinion that is a dangerously misleading use
of the term; it invites errors of thought and understanding.)
Contexts: labor
SLID: Stands for Survey of Labour and Income Dynamics. A Canadian government database going
back to 1993 at least. Web pages on this subject can be searched from:
http://www.statcan.ca/english/search/index.htm.
SLLN: Stands for strong law of large numbers.
SMA: Structural Moving Average model, which see
Smithian growth: Paraphrasing directly from Mokyr, 1990: Economic growth brought about by
increases in trade.
Source: Mokyr, 1990, pp 4-6

smoothers: Smoothers are estimators that produce smooth estimates of regression functions. They are
nonparametric estimators. The most common and implementable types are kernel estimators, k-nearest-
neighbor estimators, and cubic spline smoothers.

smoothing: Smoothing of a data set {Xi, Yi} is the act of approximating m() in a regression such as:
Yi = m(Xi) + ei
The result of a smoothing is a smooth functional estimate of m().

SMR: Standardized mortality ratio

Contexts: demography; epidemiology
SMSA: Stands for Standard Metropolitan Statistical Area, a U.S. term for the standard boundaries of
urban regions for purpose of measurement. Defined by the U.S. Census Bureau. There are 250-300 of
these.
Contexts: data
SNP: abbreviation for 'seminonparametric', which means the same thing as semiparametric.
social capital: The relationships of a person which lead to economically productive consequences. E.g.,
they may produce something analogous to investment returns to that person, or socially productive
consequences to a larger society. "'Social capital' refers to the benefits of strong social bonds.
[Sociologist James] Coleman defined the term to take in 'the norms, the social interworks, the
relationships between adults and children that are of value for the children's growing up.' The support of
a strong community helps the child accumulate social capital in myriad ways; in the [1990s U.S.] inner
city, where institutions have disintegrated, and mothers often keep children locked inside out of fear for
their safety, social capital hardly exists." -- Traub (2000)
Source: Traub, James. The New York Times. January 16, 2000. Sunday, Late Edition, final. Article in
section 6, starting page 52, column 1, Magazine Desk.
A World Bank publication suggests that James Coleman has a "classic 1987 article" called "Social
Capital in the Creation of Human Capital" which was fundamental to the use of the term social capital in
the social sciences.
With thanks to: Isaac McFarlin for finding this definition

Contexts: labor; sociology; education
social planner: One solving a Pareto optimality problem. The problem faced by a social planner will
have as an answer an allocation, without prices.
Also, "the social planner is subject to the same information limitations as the agents in the economy." --
Cooley and Hansen p 185 That is, the social planner does not see information that is hidden by the rules
of the game from some of the agents. If an agent happens not to know something, but it is not hidden
from him by the rules of the game, then the social planner DOES see it.
social savings: A measurement of a new technology discussed in Crafts (2002). "How much more did [a
new technology] contribute than an alternative investment might have yielded?" and cites Fogel (1979).
social welfare function: A mapping from allocations of goods or rights among people to the real
numbers.
Such a social welfare function (abbreviated SWF) might describe the preferences of an individual over
social states, or might describe outcomes of a process that made allocations, whether or not individuals
had preferences over those outcomes.
Contexts: models; public economics

SOFFEX: Swiss Options and Financial Futures Exchange
Solas: Software for imputing values to missing data, published by Statistical Solutions.
Solovian growth: Paraphrasing from Mokyr (1990): Economic growth brought about by investment,
meaning increases in the capital stock.
Source: Mokyr, 1990, p. 4-6.

Solow growth model: Paraphrasing pretty directly from Romer, 1996, p 7:

The Solow model is meant to describe the production function of an entire economy, so all variables are
aggregates. The date or time is denoted t. Output or production is denoted Y(t). Capital is K(t). Labor
time is denoted L(t). Labor's effectiveness, or knowledge, is A(t). The production function is denoted F()
and is assumed to have constant returns to scale. At each time t, the production function is:
Y = F(K, AL)
which can be written: Y(t) = F(K(t), A(t)L(t))
AL is effective labor.
Note variants of the way A enters into the production function. This one is called labor-augmenting or
Harrod-neutral. Others are capital-augmenting, e.g. Y=F(AK,L), or , like Y=AF(K,L). --------------------
From _Mosaic of Economic Growth_: DEFN of Solow-style growth models: They come from the
seminal Solow (1956). "In Solow-style models, there exists a unique and globally stable growth path to
which the level of labor productivity (and per capita output) will converge, and along which the rate of
advance is fixed (exogenously) by the rate of technological progress." Many subsequent models of agg
growth (like Romer 1986) have abandoned the assumption that all forms of kap accumulation run into
diminishing marginal returns, and get different global convergence implications. (p22)
Source: Romer, 1996, p 7; Solow, 1956; that is: Solow, Robert. "A contribution to the theory of
economic growth." Quarterly Journal of Economics. Feb. 1956
Contexts: macro
Solow residual: A measure of the change in total factor productivity in a Solow growth model. This is a
way of doing growth accounting empirically either for an industry or more commonly for a
macroeconomy. Formally, roughly following Hornstein and Krusell (1996):
Suppose that in year t an economy produces output quantity yt with exactly two inputs: capital quantity
kt and labor quantity lt. Assume perfectly competitive markets and that production has constant returns
to scale. Let capital's share of income be fixed over time and denoted a. Then the change in total factor
productivity between period t and period t+1, which is the Solow residual, is defined by:
Solow residual = (log TFPt+1) - (log TFPt)
= (log yt+1) - (log yt)

- a(log kt+1) - a(log kt)

- (1-a)(log lt+1) - (1-a)(log lt)
Analogous definitions exist for more complicated models (with other factors besides capital and labor)
or on an industry-by-industry basis, or with capital's share varying by time or by industry.
The equation may look daunting but the derivations are not difficult and students are sometimes asked to
practice them until they are routine. Hulten (2000) says about the residual that:
-- it measures shifts in the implicit aggregate production function.
-- it is a nonparametric index number which measures that shift in a computation that uses prices to
measure marginal products.
-- the factors causing the measured shift include technical innovation, organizational and institutional
changes, fluctuations in demand, changes in factor shares (where factors are capital, labor, and
sometimes measures of energy use, materials use, and purchased services use), and measurement errors.
From an informal discussion by this editor, it looks like the residual contains these empirical factors,
among others: public goods like highways; externalities from networks like the Internet; some
externalities and losses of capital services from disasters like September 11; theft; shirking; and
technical / technological change.
Source: Hornstein, Andreas, and Per Krusell. 1996. "Can technology improvements cause productivity
slowdowns?" NBER Macroeconomics Annual 1996. MIT Press. pp 214-215.
Hulten, 2000
Contexts: macro
solution concept: A phrase relevant to game theory. A game has a 'solution' which may represent a
model's prediction. The modeler often must choose one of several substantively different solution
methods, or solution concepts, which can lead to different game outcomes. A solution concept may be
preferred to others in context where it makes a unique prediction. Game solution concepts include:
iterative elimination of strictly dominated strategies

Nash equilibrium
subgame perfect equilibrium
perfect Bayesian equilibrium
Contexts: phrases; game theory; modelling
source: "In a second-order [linear difference equation] system, ... if both roots are positive and greater
than one, then the system diverges monotonically to plus or minus infinity. If the roots are complex and
[lie] outside the unit circle then the system spirals out away from the steady state. If at least one root is
negative, but both roots are greater than one in absolute value, then the system will flip from one side of
the steady state to the other as it diverges to infinity. In each of these cases the steady state is called a
source." Constrast 'sink'.
sparse: A matrix is sparse if many of its values are zero. A division of sample data into discrete bins
(that is into a multinomial table) is sparse if many of the bins have no data in them.

spatial autocorrelation: Usually autocorrelation means correlation among the data from different time
periods. Spatial autocorrelation means correlation among the data from locations. There could be many
dimensions of spatial autocorrelation, unlike autocorrelation between periods. Nick J. Cox () wrote, in a
broadcast to a listserv discussing the software Stata, this discussion of spatial autocorrelation. It is
quoted here without any explicit permission whatsoever. (Parts clipped out are marked by 'snip'.) If
'Moran measure' and 'Geary measure' are standard terms used in economics I'll add them to the glossary.
Date: Thu, 15 Apr 1999 12:29:10 GMT

From: "Nick Cox"
Subject: statalist: Spatial autocorrelation
[snip...]
First, the kind of spatial data considered here is data in two-dimensional

space, such as rainfall at a set of stations or disease incidence in a set of
areas, not three-dimensional or point pattern data (there is a tree or a
disease case at coordinates x, y). Those of you who know time series might
expect from the name `spatial autocorrelation' estimation of a function,
autocorrelation as a function of distance and perhaps direction. What is
given here are rather single-value measures that provide tests of
autocorrelation for problems where the possibility of local influences is of
most interest, for example, disease spreading by contagion. The set-up is that
the value for each location (point or area) is compared with values for its
`neighbours', defined in some way.
The names Moran and Geary are attached to these measures to honour the pioneer
work of two very fine statisticians around 1950, but the modern theory is due
to the statistical geographer Andrew Cliff and the statistician Keith Ord.
For a vector of deviations from the mean z, a vector of ones 1, and a matrix
describing the neighbourliness of each pair of locations W, the Moran measure
for example is
(z' W z) / (z' z)
I = -----------------
(1' W 1) / (1' 1)
where ' indicates transpose. This measure is for raw data, not regression
residuals.
[snip; and the remainder discusses a particular implementation of a spatial

autocorrelation measuring function in Stata.]
For n values of a spatial variable x defined for various locations,

which might be points or areas, calculate the deviations
_
z = x - x
and for pairs of locations i and j, define a matrix
W = ( w )
ij
describing which locations are neighbours in some precise sense.

For example, w might be assigned 1 if i and j are contiguous areas

ij
and 0 otherwise; or w might be a function of the distance between
ij
i and j and/or the length of boundary shared by i and j.
The Moran measure of autocorrelation is
n n n n n 2
n ( SUM SUM z w z ) / ( 2 (SUM SUM w ) SUM z )
i=1 j=1 i ij j i=1 j=1 ij i=1 i
and the Geary measure of autocorrelation is
n n 2 n n n 2
(n -1) ( SUM SUM w (z - z ) ) / ( 4 (SUM SUM w ) SUM z )
i=1 j=1 ij i j i=1 j=1 ij i=1 i
and these measures may used to test the null hypothesis of no spatial
autocorrelation, using both a sampling distribution assuming that x
is normally distributed and a sampling distribution assuming randomisation,
that is, we treat the data as one of n! assignments of the n values to
the n locations.
In a toy example, area 1 neighbours 2, 3 and 4 and has value 3

2 1 and 4 2
3 1 and 4 2
4 1, 2 and 3 1
This would be matched by the data
^_n^ (obs no) ^value^ (numeric variable) ^nabors^ (string variable)

- ----------- ------------------------ ------------------------
1 3 "2 3 4"
2 2 "1 4"
3 2 "1 4"
4 1 "1 2 3"
That is, ^nabors^ contains the observation numbers of the neighbours of

the location in the current observation, separated by spaces. Therefore,
the data must be in precisely this sort order when ^spautoc^ is called.
Note various assumptions made here:
1. The neighbourhood information can be fitted into at most a ^str80^

variable.
2. If i neighbours j, then j also neighbours i and both facts are

specified.
By default this data structure implies that those locations listed

have weights in W that are 1, while all other pairs of locations are not
neighbours and have weights in W that are 0.
If the weights in W are not binary (1 or 0), use the ^weights^ option.
The variable specified must be another string variable.
^_n^ (obs no) ^nabors^ (string variable) ^weight^ (string variable)

- ----------- ------------------------ ------------------------
1 "2 3 4" ".1234 .5678 .9012"
etc.

that is, w = 0.1234, and so forth. w need not equal w .

12 ij ji
[snip]
References
- ----------
Cliff, A.D. and Ord, J.K. 1973. Spatial autocorrelation. London: Pion.
Cliff, A.D. and Ord, J.K. 1981. Spatial processes: models and
applications. London: Pion.
Author
- ------
Nicholas J. Cox, University of Durham, U.K.
n.j.cox@@durham.ac.uk
- ------------------------- end spautoc.hlp
Nick
n.j.cox@durham.ac.uk
Source: statalist, Nick J. Cox (N.J.Cox@durham.ac.uk, as of 4/15/99)

With thanks to: Nicholas J. Cox, University of Durham, U.K. (n.j.cox@durham.ac.uk)
SPE: Abbreviation for: Subgame perfect equilibrium
specie: A commodity metal backing money; historically specie was gold or silver.
spectral decomposition: The factorization of a positive definite matrix A into A=CLC' where L is a
diagonal matrix of eigenvalues, and the C matrix has the eigenvectors. That decomposition can be
written as a sum of outer products:
A = (sum from i=1 to i=N of) Licici'
where ci is the ith column of C.

spectrum: Summarizes the periodicity properties of a time series or time series sample xt. Often
represented in a graph with frequency, or period, (often denoted little omega) on the horizontal axis, and
Sx (omega), which is defined below, on the vertical axis. Sx is zero for frequencies that are not found in
the time series or sample, and is increasingly positive for frequencies that are more important in the data.

Sx(omega) = (2pi)-1(sum for j from -infinity to +infinity of) je-ijomega
where j is the jth autocovariance, omega is in the range [-pi, pi], and i is the square root of -1.
Example 1: If xt is white noise, the spectrum is flat. All cycles are equally important. If they were not,
the series would be forecastable.
Example 2: If xt is an AR(1) process, with coefficient in (0, 1), the spectrum has a peak at frequency
zero and declines monotonically with distance from zero. This process does not have an observable
cycle.
Source: Wouter J. den Haan, April 1996, "The Comovements between real activity and prices at
different business cycle frequencies", as presented at Northwestern, April 21, 1997. Possibly a UCSD or
NBER working paper. Supported by NSF grant SBR-9514813. Another good reference is Priestly, 1994.
speculative demand: The speculative demand for money is inversely related to the interest rate.
Source: Branson
Contexts: money
spline function: The kind of estimate producted by a spline regression in which the slope varies for
different ranges of the regressors. The spline function is continuous but usually not differentiable.

spline regression: A regression which estimates different linear slopes for different ranges of the
independent variables. The endpoints of the ranges are called knots.

spline smoothing: A particular nonparametric estimator of a function. Given a data set {X i, Yi} it
estimates values of Y for X's other than those in the sample. The process is to construct a function that
balances the twin needs of (1) proximity to the actual sample points, (2) smoothness. So a 'roughness
penalty' is defined. See Hardle's equation 3.4.1 near p. 56 for the 'cubic spline' which seems to be the
most common.

SPO: stands for Strongly Pareto Optimal, which see.
SPSS: Stands for 'Statistical Product and Service Solutions', a corporation at www.spss.com

Contexts: data
SSEP: Social Science Electronic Publishing, Inc.
Contexts: data
SSRN: Social Science Research Network Their web site
Contexts: data
stabilization policy: "Macroeconomic stabilization policy consists of all the actions taken by
governments to (1) keep inflation low and stable; and (2) keep the short-run (business cycle) fluctuations
in output and employment small." Includes monetary and fiscal policies, international and exchange rate
policy, and international coordination. (p129 in Taylor (1996)).
Source: Taylor, John B. 1996. "Stabilization Policy and Long-Term Economic Growth." In The Mosaic
of Economic Growth, edited by Ralph Landau, Timothy Taylor, and Gavin Wright. Stanford University
Press.
Contexts: macro
stable distributions: See Campbell, Lo, and MacKinlay pp 17-18. Ref to French probability theories
Levy. The normal, Cauchy, and Bernoulli distrbutions are special cases. Except for the normal
distrbituion, they have infinite variance.
There has been some study of whether continuously compounded asset returns could fit a stable
distribution, given that their kurtosis is too high for a normal distribution.
Source: Campbell, Lo, and MacKinlay 1996, pp 17-18

stable steady state: in a dynamical system with deterministic generator function F() such that N t+1=F
(Nt), a steady state is stable if, loosely, all nearby trajectories go to it.

staggered contracting: A model can be constructed in which some agents, usually firms, cannot change
their prices at will. They make a contract at some price for a specified duration, then when that time is
up can change the price. If the terms of the contracts overlap, that is they do not all end at the same time,
we say the contracts are staggered.
An important paper on this topic was Taylor (1980) which showed that staggered contracts can have an
effect of persistence -- that is, that one-time shocks can have effects that are still evolving for several
periods. This is a version of a new Keynesian, sticky-price model.
Contexts: models
standard normal: Refers to a normal distribution with mean of zero and variance of one.

Stata: Statistical analysis software. Stata web site
state price: the price at time zero of a state-contingent claim that pays one unit of consumption in a
certain future state.
Source: Huang and Litzenberger, 1988, pp 123-4

state price vector: the vector of state prices for all states.
state-space approach to linearization: Approximating decision rules by linearizing the Euler equations
of the maximization problem around the stationary steady state and finding a unique solution to the
resulting system of dynamic equations
Source: explained in King, Plosser, Rebelo (87); ref Merz 94, p 21 footnote
stationarity: The attribute of being covariance stationary, with reference to a stochastic process. Note
that strict stationarity is not a superset or subset, but a different thing.
stationary: When used to describe a stochastic process, this is usually a synonym for covariance
stationary.
Source: Enders, Walter. 1995. Applied Econometric Time Series. John Wiley & Sons, Inc.
Hamilton, J. Time Series Analysis.

Contexts: stochastic processes
statistic: a function of one or more random variables that does not depend upon any unknown
parameter.
(The distribution of the statistic may depend on one or more unknown parameters, but the statistic can
be calculated without knowing them just from the realizations of the random variables, e.g. the data in a
sample.)
In general a statistic could be a vector of values, but often it is a scalar.
Source: adapted from Hogg & Craig.

Statistica: Statistical software. See http://www.statsoft.com.
statistical discrimination: A theory of why minority groups are paid less when hired. The theory is
roughly that managers, who are of one type (say, white), are more culturally attuned to the applicants of
their own type than to applicants of another type (say, black), and therefore they have a better measure

of the likely productivity of the applicants of their own type. (There is uncertainty in the manager's
predictions about blacks and probably of whites too, but more uncertainty for blacks.) Because the
managers are risk averse they bid more for a white applicant of a given apparent productivity than for a
black one, since their measure of the white's productivity is better. This theory predicts that white
managers would offer black applicants lower starting wages than whites of the same apparent ability,
even if the manager is not prejudiced against the blacks.
Contexts: labor
statistics:
Relevant terms: acceptance region, adapted, almost surely, alternative hypothesis, ANOVA, AR, AR(1),
ARCH, autoregressive process, b, bandwidth, Bayesian analysis, Bonferroni criterion, bootstrapping,
Box-Cox transformation, Cauchy distribution, cdf, characteristic function, chi-square distribution,
coefficient of variation, complete, consistent, correlation, Cramer-Rao lower bound, cross-validation,
delta method, density function, diffuse prior, distribution function, efficiency, efficiency bound,
efficient, EGARCH, essentially stationary, estimator, excess kurtosis, expected value, exponential
distribution, exponential family, F distribution, fat-tailed, frequency function, gamma distribution,
gamma function, GARCH, Gaussian, Gaussian white noise process, generalized Wiener process, GEV,
Heaviside function, Hermite polynomials, heterogeneous process, Huber standard errors, Huber-White
standard errors, iid, information number, Ito process, Jensen's inequality, Kolmogorov's Second Law of
Large Numbers, kurtosis, LAN, leptokurtic, Lindeberg-Levy Central Limit Theorem, log-concave, log-
convex, logistic distribution, lognormal distribution, MA, main effect, MANOVA, Markov process,
Markov's inequality, martingale, martingale difference sequence, mesokurtic, MGF, moment-generating
function, Monte Carlo simulations, multivariate, MVN, noncentral chi-squared distribution, normal
distribution, Op(1), order statistic, Pareto distribution, pdf, platykurtic, Poisson distribution, Poisson
process, power, power distribution, probability function, process, random, random process, random
variable, random walk, Rao-Cramer inequality, Riemann-Stieltjes integral, second moment,
semiparametric, significance, single-crossing property, skewness, spatial autocorrelation, stable
distributions, standard normal, statistic, stochastic, stochastic process, strict stationarity, strictly
stationary, strong law of large numbers, strongly consistent, Student t, sufficient statistic, support, t
distribution, t statistic, tangent cone, Tukey boxplot, type I error, type I extreme value distribution, type
II error, uniform distribution, uniform weak law of large numbers, unit root, unit root test, UWLLN,
variance, wavelet, weak law of large numbers, weak stationarity, weakly consistent, weakly dependent,
Weibull distribution, white noise process, White standard errors, WLLN, Wold's theorem.
Contexts: fields
stochastic: synonym for random.
stochastic difference equation: A linear difference equation with random forcing variables on the right
hand side. Here is a stochastic difference equation in k:
kt+1 + kt = wt
where the k's and w's are scalars, and time t goes from 0 to infinity. The w's were exogenous forcing
variables. Or:
Akt+1 + Bkt + Ckt-1 = Dwt + et
where the k's are vectors, the w's and e's are exogenous vectors, and A, B, C, and D are constant
matrices.

Source: Sargent, 1979

stochastic dominance: An abbreviation for first-order stochastic dominance. A possible comparison

relationship between two stochastic distributions. Let the possible returns from assets A and B be
described by statistical distributions A and B. Payoff distribution A first-order stochastically dominates
payoff distribution B if for every possible payoff, the probability of getting a payoff that high is never
better in B than in A.
Much more is in Huang and Litzenberger (1988), chapter 2.
Source: Huang and Litzenberger, (1988), p. 40
stochastic kernel: Another name for stochastic transition function.
stochastic process: A stochastic process is an ordered collection of random variables. The term is
synonymous with random process. Discrete ones are indexed, often by the subscript t for time, e.g., yt,
yt+1, although such a process could be spatial instead of temporal. Continuous ones can be described as
continuous functions of time, e.g. y(t).
A stochastic process is specified by properties of the joint distribution for those random variables.
Examples:
-- the random variables are independently and identically distributed (iid).

-- the process is a Markov process
-- the process is a martingale
-- the process is white noise
-- the process is autoregressive (e.g. AR(1))
-- the process has a moving average (e.g. see MA(1))
stochastic transition function: A generalization of the Markov transition matrix which describes the
probability of a transition by a system from one set of states to another set of states. A matrix may not
describe the situation if the subsets are complicated or infinite in number.
Stolper-Samuelson theorem: In some models of international trade, trade lowers the real wage of the
scarce factor of production, and protection from trade raises it. That is a Stolper-Samuelson effect, by
analogy to their (1941) theorem in a Heckscher-Ohlin model context.
A notable case is when trade between a modernized economy and a developing one would lower the
wages of the unskilled in the modernized economy because the developing country has so many of the
unskilled.
Source: MIT Dictionary of Modern Economics, edited by David W Pearce;

Gordon H. Hanson and Matthew J. Slaughter, "The Rybczinski theorem, factor-price equalization, and
immigration: evidence from U.S. states," NBER working paper 7074, April 1999. On Web at

http://www.nber.org/papers/w7074
Stolper, Wolfgang, and Paul A. Samuelson. 1941. "Protection and real wages." Review of Economics
and Statistics 9(1): 58-73.
Contexts: trade; macro
stopping rule: A stopping rule, in the context of search theory, is a mapping from histories of draws to
one of two decisions: stop at this draw, or continue drawing.
Source: Wolinsky's D14 notes, Jan 1997

Contexts: information; search
storable: A good is storable to the degree that it does not degrade or lose its value over time. In models
of money, storable goods dominate less storable goods as media of exchange.
Contexts: money
straddle: An options trading strategy of buying a call option and a put option on the same stock with the
same strike price and expiration date. Such a strategy would result in a profitable position if the stock
price is far enough from the strike price.

Contexts: finance
strategic form: Synonym for normal form display of a game.

strategy-proof: A decision rule (a mapping from expressed preferences by each of a group of agents to
a common decision) "is strategy-proof if in its associated revelation game, it is a dominant strategy for
each agent to reveal its true preferences."
Source: Miyagawa, 1998, p 2

strict stationarity: Describes a stochastic process whose joint distribution of observations is not a
function of time. Contrast weak stationarity.
Source: Hoel, Port, and Stone, 1972, p. 122.

strict version of Jensen's inequality: Quoting directly from Newey-McFadden: "[I]f a(y) is a stricly
concave function [e.g. a(y)=ln(y)] and Y is a nonconstant random variable, then a(E[Y]) > E[a(Y)]."
Source: Newey-McFadden, Ch 36, Handbook of Econometrics, p. 2124

Contexts: models
strictly stationary: A random process {xt} is strictly stationary if the joint distribution of elements is
not a function of the index t. In one sense this is a stronger condition than covariance stationarity
because it requires also that the third and higher moments of the distributions be stationary. But a
process can be strictly stationary without being covariance stationary if it does not have a finite variance.

strip financing: Corporate financing by selling "stapled" packages of securities together that cannot be
sold separately. E.g., if a firm might sell bonds only in a package that includes a standard proportion of
senior subordinated debt, convertible debt, preferred, and common stock. A benefit is reduced conflict.
In principle bondholders and stockholders have different interests and that can impose costs on the firm.
After a strip financing, however, those groups are each made up of all the same people, so their interests
coincide.
Source: Jensen (86)

Contexts: finance
strips: securities made up of standardized proportions of other securities from the same firm. See strip
financing.
U.S. Treasury bonds can be split into principal and interest components, and the standard name for the
resulting securities is STRIPS (Separate Trading of Registered Interest and Principal of Securities). See
coupon strip and principal strip.
Source: Jensen (86)

Contexts: finance
strong form: Can refer to the strong form of the efficient markets hypothesis, which is that any public
or private information known to anyone about a security is fully reflected in its current price.
Fama (1991) renames tests of the strong form of the hypothesis to be 'tests for private information.'
Roughly -- If individuals with private information can make trading gains with it, the strong form
hypothesis does not hold.
Source: Fama, 1970.
Dow and Gorton (1996) cite this paper. Possibly it defined the term for th first time:
Roberts, Harry V. 1967. "Statistical versus clinical prediction of the stock market," working paper,
University of Chicago.
Contexts: finance
strong incentive: An incentive that encourages maximization of an objective. For example, payment per
unit of output produced encourages maximum production. Useful in design of a contract if the buyer
knows exactly what is desired. Contrast weak incentive.
Source: Weisbrod's class 5/23/97

strong law of large numbers: If {Zt} is a sequence of n iid random variables drawn from a distribution
with mean MU, then with probability one, the limit of sample averages of the Z's goes to MU as sample
size n goes to infinity.
I believe that strong laws of large numbers are generally, or perhaps always, proved using some version
of Chebyshev's inequality. (The proof is rarely shown; in most contexts in economics one can simply
assume laws of large numbers).

Contexts: statistics; econometrics; probability
strongly consistent: An estimator for a parameter is strongly consistent if the estimator goes to the true
value almost surely as the sample size n goes to infinity. This is a stronger condition than weak
consistency; that is, all strongly consistent estimators are weakly consistent but the reverse is not true.
strongly dependent: A time series process {xt} is strongly dependent if it is not weakly dependent; that
is, if it is strongly autocorrelated, either positively or negatively.
Example 1: A random walk with correlation 1 between observations is strongly dependent.
Example 2: An iid process is not strongly dependent.
Source: Discussed in Wooldridge, 1995, p 2646 which cites Robinson 1991b in J of econometrics.
strongly ergodic: A stochastic process may be strongly ergodic even if it is nonstationary. A strongly
ergodic process is also weakly ergodic.
strongly Pareto Optimal: A strongly Pareto optimal allocation is one such that no other allocation
would be both (a) as good for everyone and (b) strictly preferred by some.
strongly stationary: Synonym for strictly stationary, regarding a stochastic process.
Source: Hoel, Port, and Stone, 1972

structural break: A structural change detected in a time series sample.
structural change: A change in the parameters of a structure generating a time series. There exist tests
for whether the parameters changed. One is the Chow test.
Examples: (planned)
structural moving average model: The model is a multivariate, discrete time, dynamic econometric
model. Let yt be an ny x 1 vector of observable economic variables, C(L) is a n y x ne matrix of lag
polynomials, and et be a vector of exogenous unobservable shocks, e.g. to labor supply, the quantity of
money, and labor productivity. Then:
yt=C(L)et

is a structural moving average model.
Source: M.W. Watson, Ch 57, Handbook of Econometrics, p 2899.

structural parameters: Underlying parameters in a model or class of models.
If a theoretical model explains two effects of variable x on variable y, one of which is positive and one
negative, they are structurally separate. In another model, in which only the net effect of x on y is
relevant, one structural parameter for the effect may be sufficient.
So a parameter is structural if a theoretical model has a distinct structure for its effect. The definition is
not absolute, but relative to a model or class of models which are sometimes left implicit.
structural unemployment: Unemployment that comes from there being an absence of demand for the
workers that are available. Contrast frictional unemployment.
Source: Baumol & Blinder

structure: A model with its parameters fixed. One can discuss properties of a model with various
parameters, but 'structural' properties are those that are fixed unless parameters change.
Source: Davidson and MacKinnon, 1993, I think, but can't find the exact page.
Student t: Synonym for the t distribution. The name came about because the original researcher who
described the t distribution wrote under the pseudonym 'Student'.
stylized facts: Observations that have been made in so many contexts that they are widely understood to
be empirical truths, to which theories must fit. Used especially in macroeconomic theory. Considered
unhelpful in economic history where context is central.
Relevant terms: Engel's law.
Contexts: fields; phrases
subdifferential: A class of slopes. By example -- consider the top half of a stop sign as a function
graphed on the xy-plane. It has well-defined derivatives except at the corners. The subdifferential is
made up of only one slope, the derivative, at those points. At the corners there are many 'tangents' which
define lines that are everywhere above the stop sign except at the corner. The slopes of those lines are
members of the subdifferential at those points.
In general equilibrium usage, the subdifferential can be a class of prices. It's the set of prices such that
expanding the total endowment constraint would not cause buying and selling, because the agents have
optimized perfectly with respect to the prices. So if a set of prices is possible for a Walrasian
equilibrium, it is in the subdifferential of that alocation.

subgame perfect equilibrium: An equilibrium in which the strategies are a Nash equilibrium, and,
within each subgame, the parts of the strategies relevant to the subgame make a Nash equilibrium of the
subgame.
submartingale: A kind of stochastic process; one in which the expected value of next period's value, as
projected on the basis of the current period's information, is greater than or equal to the current period's
value.
This kind of process could be assumed for securities prices.
Source: Fama, 1970, p 386

subordinated: Adjective. A particular debt issue is said to be subordinated if it was senior but because
of a subsequent issue of debt by the same firm is no longer senior. One says, 'subordinated debt'.
Contexts: finance
substitution bias: A possible problem with a price index. Consumers can substitute goods in response
to price changes. For example when the price of apples rises but the price of oranges does not,
consumers are likely to switch their consumption a little bit away from apples and toward oranges, and
thereby avoid experiencing the entire price increase. A substitution bias exists if a price index does not
take this change in purchasing choices into account, e.g. if the collection ("basket") of goods whose
prices are compared over time is fixed.
"For example, when used to measure consumption prices between 1987 and 1992, a fixed basket of
commodities consumed in 1987 gives too much weight to the prcies that rise rapidly over the timespan
and too little weight to the prices that have fall; as a result, using the 1987 fixed basket overstates the
1987-92 cost-of-living change. Conversely, because consumers substitute, a fixed basket of
commodities consumed in 1992 gives too much weight to the prices that have fallen over the timespan
and to little to the prices that have risen; as a result, the 1992 fixed based understates the 1987-92 cost-
of-living change." (Triplett, 1992)
Source: Triplett, 1992, p. 50

Contexts: macro; prices
SUDAAN: A statistical software program designed especially to analyze clustered data and data from
sample surveys. The SUDAAN Web site is at http://www.rti.org/patent s/sudaan/sudaan.html.
Contexts: data; estimation; code
sufficient statistic: Suppose one has samples from a distribution, does not know exactly what that
distribution is, but does know that it comes from a certain set of distributions that is determined partly or
wholly by a certain parameter, . A statistic is sufficient for inference about  if and only if the values of
any sample from that distribution give no more information about  than does the value of the statistic
on that sample.
E.g. if we know that a distribution is normal with variance 1 but has an unknown mean, the sample

average is a sufficient statistic for the mean.
sunk costs: Unrecoverable past expenditures. These should not normally be taken into account when
determining whether to continue a project or abandon it, because they cannot be recovered either way. It
is a common instinct to count them, however.
sup: Stands for 'supremum'. A value is a supremum with respect to a set if it is at least as large as any
element of that set. A supremum exists in context where a maximum does not, because (say) the set is
open; e.g. the set (0,1) has no maximum but 1 is a supremum.
sup is a mathematical operator that maps from a set to a value that is syntactically like an element of that
set, although it may not actually be a member of the set.
superlative index numbers: "What Diewert called 'superlative' index numbers were those that provide
a good approximation to a theoretical cost-of-living index for large classes of consumer demand and
utility function specifications. In addition to the Tornqvist index, Diewert classified Irving Fisher's
'Ideal' index as belong to this class." -- Gordon, 1990, p. 5
from harper (1999, p. 335): The term "superlative index number" was coined by W. Erwin Diewert
(1976) to describe index number formulas which generate aggregates consistent with flexible
specifications of the production function."
Two examples of superlative index number formulas are the Fisher Ideal Index and the Tornqvist index.
These indexes "accomodate subsitution in consumer spending while holding living standards constant,
something the Paasche and Laspeyres indexes do not do." (Triplett, 1992, p. 50).
Source: Diewert, 1976; Gordon, 1990, p. 5; Triplett, 1992, p. 50

superneutrality: Money in a model 'is said to be superneutral if changes in [nominal] money growth
have no effect on the real equilibrium.' Contrast neutrality.
Source: Blanchard & Fischer, p. 207

Contexts: money; macro; models
supply curve: For a given good, the supply curve is a relation between each possible price of the good
and the quantity that would be supplied for market sale at that price.
Drawn in introductory classes with this arrangement of the axes, although price is thought of as the
independent variable:
Price | / Supply
| /
| /
| /
|________________________
Quantity

Contexts: micro
support: of a distribution. Informally, the domain of the probability function; includes the set of
outcomes that have positive probability. A little more exactly: a set of values that a random variable may
take, such that the probability is one that it will take one of those values. Note that a support is not
unique, because it could include outcomes with zero probability.

Contexts: probability; statistics
SUR: Stands for Seemingly Unrelated Regressions. The situation is one where the errors across
observations are thought to be correlated, and one would like to use this information to improve
estimates. One makes an SUR estimate by calculating the covariance matrix, then running GLS.
The term comes from Arnold Zellner and may have been used first in Zellner (1962).
Source: StataCorp. 1999. Stata statistical software release 6.0 manual, vol 4., pages 8 and 14.
Zellner, A. 1962. "An efficient method of estimating seeming unrelated regressions and tests for
aggregation bias." Journal of the American Statistical Association 57: 348-368.
Zellner, A. 1963. "Estimators for seemingly unrelated regression equations: Some exact finite sample
results." Journal of the American Statistical Association 58: 977-992.
Zellner, A., and D.S. Huang. 1962. "Further properties of efficient estimators for seemingly unrelated
regression equations." International Economic Review 3: 300-313.
SURE: same as SUR estimation.
Survey of Consumer Finances: There is a U.S. survey and a Canadian survey by this name.
The U.S. one is a survey of U.S. households by the Federal Reserve which collects information on their
assets and debt. The survey oversamples high income households because that's where the wealth is. The
survey has been conducted every three years since 1983.
The Canadian one is an annual supplement to the Labor Force Survey that is carried out every April.
Source: For the Canadian definition, see page 297 of:

Kevin M. Murphy, W. Craig Riddell, and Paul M. Romer. 1998. "Wages, skills, and technology in the
United States and Canada", Chapter 11 of General purpose technologies and economic growth, edited
by Elhanan Helpman. MIT Press.
survival function: From a model of durations between events (which are indexed here by i). Probability
that an event has not happened since event (i-1), as a function of time.
E.g. denote that probability by S i():
Si(t | ti-1, ti-2, ...)

SVAR: Structured VAR (Vector Autoregression).

The SVAR representation of a SMA model comes from inverting the matrix of lag polynomials C(L)
(see the SMA definition) to get: A(L)y t=et
The SVAR is useful for (1) estimating A(L), (2) reconstructing the shocks e t if A(L) is known.
Source: M.W. Watson, Ch 47, Handbook of Econometrics, p 2901.

symmetric: A matrix M is symmetric if for every row i and column j, element M[i,j] = M[j,i].
t distribution: Defined in terms of a normal variable and a chi-squared variable. Let z~N(0,1) and v~X2
(That is, v is drawn from a chi-squared distribution with n degrees of freedom.) Then t = z(n/v) 1/2
(n) .
has a t distribution with n degrees of freedom. The t distribution is a one-parameter family of
distributions. n is that parameter here. The t distribution is symmetric around zero and asymptotically (as
n goes to infinity) approaches the standard normal distribution.
Mean is zero, and variance is n/(n-2).
Source: Johnston, p. 530

t statistic: After an estimation of a coefficient, the t-statistic for that coefficient is the ratio of the
coefficient to its standard error. That can be tested against a t distribution (which see) to determine how
probable it is that the true value of the coefficient is really zero.
tangent cone: Informally: a set of vectors that is tangent to a specified point.
Source: Tripathi, 1996, p 8 and on

Contexts: mathematics, statistics
team production: Defined by Alchian and Demsetz (1972) this way: "Team pproductive activity is that
in which a union, or joint use, of inputs yields a larger output than the sum of the products of the
separately used inputs." (p. 794)
Source: Alchian and Demsetz, 1972, p 794

Contexts: theory of the firm; IO; corporate finance
technical change: A change in the amount of output produced from the same inputs. Such a change is
not necessarily technological; it might be organizational, or the result of a change in a constraint such as
regulation, prices, or quantities of inputs.
According to Jorgenson and Stiroh (May 1999 American Economic Review p 110), sometimes total

factor productivity (TFP) can be a synonym for technical change. A possible measure is output per unit
of factor input. Jorgenson and Stiroh also have an explanation of how it is definitionally possible for
how a technological revolution not to lead to technical change as measured in these ways.
Contexts: macro
technological change: A change in the set of feasible production possibilities.

Contrast technical change.
technology shocks: An event, in a macro model, that changes the production function. Commonly this
is modeled with a aggregate production function that has a scaling factor, e.g.:
F(Kt,Nt) = AtKaN(1-a)
where At a time series of technology shocks whose values can be estimated or whose stochastic process
(joint distribution) might be conjectured to have certain properties.
By this definition the oil shocks of the 1970s were technology shocks -- that is, for any given aggregate
capital stock or labor stock, production was more expensive after an oil shock because energy would be
more expensive. This interpretation explains why real business cycle theory drew interest in economics
in the 1970s after the oil shocks had such a dramatic impact on Western economies.
tenure: In the context of studies of employees, length of time with current employer in current job.
Contrast experience.
Contexts: labor; corporate finance
term spreads: "long-term minus short-term interest rates"

Contexts: finance
terms of trade: An index of the price of a country's exports in terms of its imports. The terms of trade
are said to improve if that index rises. (Obstfeld and Rogoff, p 25)
An analogous use is when comparing relative prices. If the cost of agricultural goods in terms of
industrial goods goes up, one might say the "terms of trade ... shifted in favor of agricultural
products." (North and Thomas, p 108).
Source: Obstfeld and Rogoff, 1996, p 25

North, Douglass C. and Robert Paul Thomas. 1973/1992. The Rise of the Western World: A New
Economic History. Cambridge University Press.
tertiary sector: Literally, 'third sector'. Per Landes, 1969/1993, p 9, refers to the "administrative and
service sector of the economy".
In context of Williamson and Lindert, 1980, p 172, is defined more specifically to be the sector of
production outside of agriculture and industry, and includes construction, trade, finance, real estate,
private services, government, and sometimes transportation.

Source: Landes, 1969/1993, p 9; Williamson and Lindert, 1980, p 172

Contexts: macro
test for structural change: An econometric test to determine whether the coefficients in a regression
model are the same in separate subsamples. Often the subsamples come from different time periods. See
Chow test.

test of identifying restrictions: synonym for Hausman test, in practice. Only overidentifying
restrictions (assumptions) can be tested.
test statistic: "A random variable [T, in this example] of which the probability distribution is known,
either exactly or approximately, under the null hypothesis. We then see how likely the observed value of
T is to have occurred, according to that probability distribution. If T is a number that could easily have
occurred by chance [under the tested hypothesis], then we have no evidence against the null hypothesis
H0. However if it is a number that would occur by chance only rarely, we do have evidence against the
null, and may well decide to reject it."

TFP: Abbreviation for Total Factor Productivity.
Contexts: macro
the standard model: Has a variety of meanings, and can be a confusing phrase to outsiders to a
discussion. Often implicitly contrasts the model at hand to a simpler, earlier one in the same literature,
sometimes with the implication that variations from the earlier one ought, in the speaker's opinion, to be
justified explicitly.
A standard model of a firm is one in which it is strictly and always profit maximizing. Often 'profit' is
interpreted in a short term way, but depending on context it may refer to a long run present-discounted
value kind of profit.
A standard model of individuals seeking jobs is that they are strictly consumption maximizing, and
therefore wage maximizing. Occasionally a long run present discounted value of wages is the objective.
If time away from work is relevant, the consumer maximizes some combination of consumption/ wage
and time away from work, or 'leisure'.
A standard model of international trade is one in which countries specialize toward their comparative
advantages.
A standard model of a product market is one in which (1) all producers (called firms) and consumers
(thought of as individuals) are price takers and variations in any one actor's production or consumption
have no effect on the price; (2) the demand curve is strictly increasing (that is the price and quantity are
positively correlated); (3) the supply curve is strictly decreasing (that is, price and quantity are

negatively correlated); (4) the good is infinitely divisible.
Contexts: phrases
theory of the firm: Subject is: What are the nature, extent, and purposes of firms? This organization of
the answers comes from Hart's book.
Categories of answers:
Neoclassical theories of the firm identify it with its production technology, and usually define the
driving objective of the firm as maximizing its profits given its technology.
Principal-agent theories of firms -- that firms are organized to divide work among many people in ways
that minimize principal agent problems.
Transaction cost theories -- that comprehensive contracts with workers are unrealistic and that the
structure of a firm (e.g., a hierarchical one) is useful for efficiently doing a job. First academic paper of
this kind was Coase, 1937.
Property rights theories -- that ownership is a source of power ... --------- theory of the firm: firm
organization substitutes for contracts, firms reduce uncertainty and opportunistic behavior, and set
incentives to elicit efficient responses from agents. -- Mokyr's rise and fall paper
Source: Hart, 1995; Coase, 1937

Contexts: IO
theta: As used with respect to options: The rate of change of the value of a portfolio of derivatives with
respect to time with all else held constant. Formally this is a partial derivative.

Contexts: finance
tightness: An attribute of a market.
In securities markets, tightness is "the cost of turning around a position over a short period of
time." (Kyle, 1985, p 1316). [Does 'cost' mean trading costs, alone? So does 'turning around' just mean
'trading'?]
A labor market is said to be tight if employers have trouble filling jobs, or if there is a long wait to fill an
available job. It is not evidence that the labor market is tight if potential employees have trouble finding
jobs or must wait to get one.

Contexts: finance; labor
time consistency: Opposite of time inconsistency or dynamic inconsistency.
Contexts: macro
time deposits: The money stored in the form of savings accounts at banks.

time inconsistency: Same as dynamic inconsistency.
Contexts: dynamic optimization
time preference: A utility function may or may not have the property of time preference. Time
preference is an intense preference to receive goods or services immediately.
The discount factor preference to avoid delay must be more than multiplictavely linear in the delay time
passed, or one would not use this term to describe the utility function. In theory this attribute is
analytically distinct from other reasons to want something sooner, such as interest rates; the bounded
rationality problem of remembering how and when to consume the good later; or discounting of future
events for reasons of opportunity, risk, or uncertainty (e.g., the chance of surviving to a later time).
There is evidence that human behavior exhibits great impatience which might be modeled well by time
preference and perhaps can perhaps be distinguished from these other factors. So one may read
references to empirical observations of time preference, though as far as this editor can tell the concept
is quite theoretical and some jump is required to leave all other explanations aside and link it directly to
an observation.
Contexts: micro theory; utility
time series: A stochastic process where the time index takes on a finite or countably infinite set of
values. Denoted, e.g. {Xt | for all integers t}. Relevant terms:
Relevant terms: AIC, Akaike's Information Criterion, AR, ARCH, ARIMA, ARMA, augmented Dickey-
Fuller test, autocorrelation, autocovariance, autocovariance matrix, autoregressive process, Box-Jenkins,
Box-Pierce statistic, BVAR, Cochrane-Orcutt estimation, cointegration, convolution, covariance
stationary, Dickey-Fuller test, Donsker's theorem, Durbin's h test, Durbin-Watson statistic, ergodic,
error-correction model, essentially stationary, FCLT, filter, Gaussian white noise process, generalized
Wiener process, Granger causality, heterogeneous process, I(0), I(1), integrated, invertibility, Ito
process, lag operator, Lindeberg-Levy Central Limit Theorem, Ljung-Box test, MA, Markov chain,
Markov property, mixing, nonergodic, own, Ox, Phillips-Perron test, portmanteau test, Prais-Winsten
transformation, Q-statistic, QLR, random, random process, random walk, Riemann-Stieltjes integral,
Schwarz Criterion, spectrum, stochastic, strict stationarity, strictly stationary, strongly dependent,
strongly ergodic, strongly stationary, structural break, structural change, submartingale, SVAR, trend
stationary, uniform weak law of large numbers, unit root, unit root test, UVAR, UWLLN, VAR,
variance decomposition, variance ratio statistic, VARs, volatility clustering, Wallis statistic, weak law of
large numbers, weak stationarity, weakly dependent, weakly ergodic, WLLN, Wold decomposition,
Wold's theorem.
See Editor's comment on time series.
Contexts: fields
time-varying covariates: Means the same thing as time-dependent covariates; that the covariates
(regressors, probably) change over time.
Source: statalist, general discussion

tit-for-tat: A strategy in a repeated game (or a series of similar games). When a Prisoner's dilemma

game is repeated between the same players, the tit-for-tat strategy is to choose the 'cooperate' action
unless in the previous round, one's opponent chose to defect, in which case one responds by choosing to
defect this round. This tends to induce cooperative behavior against an attentive opponent.
Tobin tax: A tax on foreign currency exchanges.
Tobin's marginal q: The ratio of the change in the value of the firm to the added capital cost for a small
increment to the capital stock. If the firm is in equilibrium, it's marginal q is one; all investments that
add more to the value of the firm than their cost have already been undertaken, and if we knew the
replacement cost of capital we could look up the stock market value of a firm and calculate its average q
directly.
Source: Branson, Ch 13
Contexts: macro
Tobin's q: This description comes from Dow and Gorton, (1996): The ratio of the current market value
of a firm's assets to their cost. If q is greater than 1, the firm should increase its capital stock. It follows
that, according to "Fischer and Merton (1984), 'the stock market should be a predictor of the rate of
corporate investment' (p 84-85)" -- that is,"rising stock prices cause higher investment [by firms]. The
empirical evidence is consistent with this view: investment in plant and eqipment increases following a
rise in stock prices in all countries that have been studied. In fact, lagged stock returns outperform q in
predicting investment [at both] the macroeconomic level and in cross-sections of firms. See Barro
(1990), Bosworth (1975), and Welch (1994)."
Source: Quoted from: James Dow and Gary Gorton. 1996. "Stock market efficiency and economic
efficiency: is there a connection?" European University Institute, London Business School, the Wharton
Schoo, and NBER. Working paper. Barro, Robert J. 1990. "The stock market and investment," Review
of Financial Studies 3: 115-131. Bosworth, Barry. 1975. "The stock market and the economy,"
Brookings Papers on Economic Activity 2: 257-300. Fischer, Stanley, and Robert C. Merton. 1984.
"Macroeconomics and finance: the role of the stock market," Carnegie-Rochester Conference Series on
Public Policy 21: 57-108. Tobin, James. 1969. "A general equilibrium approach to monetary theory"
Journal of Money, Credit, and Banking 1: 15-29. Welch, Ivo. 1994. "The cross-sectional determinants of
corporate capital expenditures: a multinational comparison." UCLA working paper.
tobit model: An econometric model in which the dependent variable is censored; in the original model
of Tobin (1958), for example, the dependent variable was expenditures on durables, and the censoring
occurs because values below zero are not observed.
The model is:
yi*=bxi+ui where ui~N(0,s2)
But yi* (e.g., durable goods desired by the consumer described by variables x i) is not observed.
yi=yi* if yi*>y0, and yi=y0 otherwise
yi is observed.
y0 is known. s2 is often treated as known. xi's are observed for all i.

top-coded: For data recorded in groups, e.g. 0-20, 21-50, 50-100, 101-and-up, we do not know the
average or distribution of the top category, just its lower bound and quantity. That data is "top-coded."
We may adjust for it by scaling up the top-code and calling that the average.
Contexts: data
topological space: A pair of sets (X, ) such that  is a topology in X. See topology.
Source: Kolmogorov and Fomin, p 78

topology: Is defined with respect to a set X. A 'topology in X' is a set of subsets of X satisfying several
criteria. Let  denote a topology in X. The sets in  are by definition 'open sets' with respect to , and sets
outside of  are not.  satisfies the following:
(1) X and the null set are in .
(2) Finite or infinite unions of open sets (that is, elements of ) are also in .
(3) Finite intersections of open sets are in .
Comments and related definitions:

More than one topology in X may be possible for a given set X.
The complement of a set in  is said to be a 'closed set'.
Element of X may be called 'points'.
A 'neighborhood' of a point x is any open set containing x.
Let M be a subset of X. A point x in X is a 'contact point' of M if every neighborhood of x contains at

least one point of M; and x would be a 'limit point' of M if every neighborhood of x contained infinitely
many points of M. The set of all contact points of M is the 'closure' of M.
A 'topological space' is a pair of sets (X, ) satisfying the above.

All metric spaces are topological spaces. The sets one would call open in a metric space satisfy the
criteria above; one could also label all subsets of X as open for purpose of listing the members of the
topology and they would then satisfy the definition above.
Given two topologies 1 and 2 on the same set X, we say that '1 is stronger than 2', or equivalently
that '2 is weaker than 1' if every set in 2 is in 1. A stronger topology thus has at least as many
elements as a weaker one.
Source: Kolmogorov and Fomin, p 78

Tornqvist index: A kind of index number which can accumulate various kinds of capital in to a single
number. Averages between periods fill in the quantities of capital and labor. Defined in Hulten to be a
discrete-time approximation to a Divisia index

Can handle a production function as complicated as a translog, not just a Cobb-Douglas. It can handle a
Cobb-Douglas production function in which the shares change over time. The Tornqvist index is a
superlative index formula. It was developed in the 1930s at the Bank of Finland, according to Triplett
(1992).
Defined at length in Dean & Harper, 1998, pages 8-9.
Source: paraphrased from Dean & Harper, Feb. 1998; Hulten, 2000; Triplett, 1992
Contexts: government; measurement
total factor productivity: Given the macro model: Yt = ZtF(Kt,Lt), Total Factor Productivity (TFP) is
defined to be Yt/F(Kt,Lt)
Likewise, given Yt = ZtF(Kt,Lt,Et,Mt), TFP is Yt/F(Kt,Lt,Et,Mt)
The Solow residual is a measure of TFP. TFP presumably changes over time. There is disagreement in
the literature over the question of whether the Solow residual measures technology shocks. Efforts to
change the inputs, like Kt, to adjust for utilization rate and so forth, have the effect of changing the
Solow residual and thus the measure of TFP. But the idea of TFP is well defined for each model of this
kind.
TFP is not necessarily a measure of technology since the TFP could be a function of other things like
military spending, or monetary shocks, or the political party in power.
"Growth in total-factor productivty (TFP) represents output growth not accounted for by the growth in
inputs." -- Hornstein and Krusell (1996). Disease, crime, and computer viruses have small negative
effects on TFP using almost any measure of K and L, although with absolutely perfects measures of K
and L they might disappear. Reason: crime, disease, and computer viruses make people AT WORK less
productive.
Source: Conversation with Martin Eichenbaum, 8/19/96

Robert E Hall. "The Relation between Price and Marginal Cost in U.S. Industry", Journal of Political
Economy, April 1996.
Hornstein, Andreas, and Per Krusell. 1996. "Can technology improvements cause productivity
slowdowns?" NBER Macroeconomics Annual 1996. MIT Press. p 214.
totally mixed strategy: In a noncooperative game, a totally mixed strategy of a player is a mixed
strategy giving positive probability weight to every pure strategy available to the player.
For a more formal definition see Pearce, 1984, p 1037. This is a rough paraphrase.

Townsend inefficiency: a possible property of monetary exchange. One of the parties is evaluating the
value of the money he gets in the transaction not the utility he generated in production.

trace: The trace of a square matrix A is the sum of the elements on its diagonal. Has the property that tr
(AB)=tr(BA).

tract: A geographical unit of the U.S. defined by the U.S. Census Bureau, usually having between a
population between 2500 and 8000. Zip codes are about five times larger. Census-defined "blocks" are a
smaller unit than tracts.
Source: Working paper by Joel Elvery; it cites on these questions this book:
U.S. Dept of Commerce, Bureau of the Census. Geographic Areas Reference Manual. 1994.
Washington, DC.
Tragedy of the commons: A metaphor for the public goods problem that it is hard to coordinate and
pay for public goods. The term comes from Hardin (1968). The commons is a pasture held by a group.
Each individual owns sheep and has the incentive to put more and more sheep on the pasture to gain,
privately. The overall effect of many individuals do this overwhelms the carrying capacity of the pasture
and the sheep cannot all survive.
Source: Hardin, 1968

Contexts: public
trajectory: series of states in a dynamical system {N 0, N1, N2, ...}. For a deterministic generator
function F() such that Nt+1 = F(Nt), then N1=F(N0), N2=F(F(N0)), etc.

transactions costs: Made up of three types per North and Thomas (1973) p 93:
-- search costs (the costs of locating information about opportunities for exchange)
-- negotiation costs (costs of negotiating the terms of the exchange)
-- enforcement costs (costs of enforcing the contract)
Source: North, Douglass C., and Robert Paul Thomas. 1973/1992. The Rise of the Western World: A
New Economic History. Cambridge University Press.
transactions demand: The transactions demand for money is positively related to income and
negatively related to the interest rate.
Source: Branson
Contexts: money
transient: In the context of stochastic processes, "A state is called transient if there is a positive
probability of leaving and never returning." -- Stokey and Lucas, p 322

Contexts: macro; stochastic processes
transition economics: Since about 1992 this term has come to mean the subject of the transition of
post-Soviet economies toward a Western free market model.
It almost never refers either to other kinds of transitions economies might undergo, nor to the subject
labeled development economics.
Contexts: phrases; fields
translog: The translog production function is a generalization of the Cobb-Douglas production function.
The name stands for 'transcendental logarithmic'. See Greene, 2nd edition, p 209-210. Cited to Berndt
and Christensen (1972); elsewhere, said to have been introduced by Christensen, Jorgenson, and Lau,
1971, p 255-6. Applied to a case like Y=f(K,L), where f() is replaced by the translog. Its use always
seems to be in estimation not in theory. Avoids strong assumptions about the functional form of the
production function; can approximate any other production function to second degree. The regression
run is, e.g. (from Greene p 209):
ln Y = b1 + b2 (ln L) + b3 (ln K) + b4 (ln L)2/2 + b5 (ln K) 2/2 + b6 (ln L)(ln K) + e
The Cobb-Douglas estimation is like this but with the restriction that b4=b5=b6=0.
Greene, p 210 says that the elasticity of output with respect to capital is in this model:
(d ln Y)/(d ln K) = b3 + b5 (ln K) + b6 (ln L) -------------------- From Lau (1996) in _Mosaic_: Flexible

functional forms such as the translog production function allow "the production [function?] elasticies to
change with differing relative factor proportions." (p76)
Source: Christensen, L.R., D.W. Jorgenson, and L.J. Lau. 1973. "Transcendental Logarithmic
Production Frontiers." Review of Economics and Statistics. 55: pp 28-45.
Greene, 1993
transpose: A matrix operation. The transpose of an M x N matrix A is an N x M matrix, denoted A' or

AT, in which the top row of A has been made into the first column of A', the second row of A has been
made into the second column of A', and so forth.
transversality condition: Limits solutions to an infinite period dynamic optimization problem.

Intuitively, it rules out those that involve accumulating, for example, infinite debt. The transversality
condition (TC) can be obtained by considering a finite, T-period horizon version of the problem of
maximizing present value, obtaining the first-order condition for nt+T, and then taking the limit of this
condition as T goes to infinity. The form is often: (TC) lim bT.... = 0
treatment effects: In the language of experiments, a treatment is something done to a person that might
have an effect. In the absence of experiments, discerning the effect of a treatment like a college
education or a job training program can be clouded by the fact that the person made the choice to be

treated. The outcomes are a combined result of the person's propensity to choose the treatment, and the
effects of the treatment itself. Measuring the treatment's effect while screening out the effects of the
person's propensity to choose it is the classic treatment effects problem.
A standard way to do this is to regress the outcome on other predictors that do not vary with time, as
well as whether the person took the treatment or not. An example is a regression of wages not only on
years-of-education but also on test scores meant to measure abilities or motivation. Both years-of-
education and test scores are positively correlated with subsequent wages, and when interpreting the
findings the coefficient found on years of education has been partly cleansed of the factors predicting
which people would have chosen to have more education.
A more advanced method is the Heckman two-step.

Contexts: econometrics; labor
trembling hand perfect equilibrium: Defined by Selten (1975). Now perfect equilibrium is considered
a synonym.
Source: Selten, 1975, as cited by Pearce, 1984, p 1037

trend stationary: A time series process is trend stationary if after trends were removed it would be
stationary.
Following Phillips and Xiao (1998): iff a time series process yt can be decomposed into the sum of other
time series as below, it is trend stationary:
yt = gxt + st
where g is a k-vector of constants, xt is a vector of deterministic trends, and st is a stationary time series.
Phillips and Xiao (1998), p. 2, say that x t may be "more complex than a simple time polynomial. For
example, time polynomials with sinusoidal factors and piecewise time polynomials may be used. The
latter corresponds to a class of models with structural breaks in the deterministic trend."
Whether all researchers would include statistical models with structural breaks in the class of those that
are trend stationary, as Phillips and Xiao do, is not known to this writer.
Note that this definition is designed to discuss the question of whether a statistical model is trend
stationary. To decide if one should think of a particular time series sample as trend stationary requires
imposing a statistical model first.
Source: Phillips, Peter C.B. and Zhijie Xiao, "A primer on unit root testing" Journal of Economic
Surveys Vol 12, No. 5, 1998.
and/or: Cowles Foundation paper No. 972, Yale University, 1999
triangular kernel: The triangular kernel is this function: (1-|u|) for -1<u<1 and zero for u outside that
range. Here u=(x-xi)/h, where h is the window width and xi are the values of the independent variable in

the data, and x is the value of the independent variable for which one seeks an estimate.

TRIPs: A recent international treaty on intellectual property.
Contexts: intellectual property; organizations
truncated dependent variable: A dependent variable in a model is truncated if observations cannot be

seen when it takes on vales in some range. That is, both the independent and the dependent variables are
not observed when the dependent variable is in that range.
A natural example is that if we have data on consumption purchases, if a consumer's willingness-to-pay

for a certain product is negative, we will never see evidence of it no matter how low the price goes. Price
observations are truncated at zero, along with identifying characteristics of the consumer in this kind of
data.
Contrast censored dependent variables.
TSP: Time series econometrics software
Tukey boxplot: A way of showing a distribution on a line, so that distributions can be compared easily
in a single diagram. Used more in statistics than in econometrics. A thin box marks out the 25th to 75th
percentiles; a dash within that box marks the median; a line marks the outer part of the distribution, and
outside dots or stars mark outliers. (The exact range of the line is also derived from the location of the
quartiles; its exact definition I do not understand from Quah, 1997; maybe is clear in Cleveland 1993.)
A rough example; consider two continuous distributions that ranges from 0 to 4:
0 1 2 3 4
|--[==+===]---| * * <= the first distribution
|-[=+==]---| <= the second distribution
The first distribution has a median around 1.3, and the main part of it ranges from .3 to 3.0. There are
some outliers at the top. The second distribution has a median near 2.0, and is more narrowly
concentrated than the first, with few outliers.
Source: Quah, 1997; Cleveland, 1993

tutorial: Matlab: From a Unix shell one can just type 'matlab' as a command on any computer that has
it, and start to type interactive statements such as those below. One could also put them in a file with
the .m extension to run them from within matlab with 'run file.m' or from the shell with 'matlab < file.m'
This tutorial covers very little but you can see something of the language.

% The percent sign begins comments.

% The statements below can be typed interactively one per line to get
% clear responses from Matlab. No need to type the comment part at the
% end of the lines. Make sure to use upper and lower case in the
% same was as in the statements shown.
A=[1 2;3 4] % defines matrix A as a 2x2 with first line [1 2]

B=A' % transpose
B=A+A % sum, element by element
Ainv=inv(A) % takes inverse of a matrix
A*Ainv % calculates and prints the result of a matrix multiplication
B=[A;A] % stacked so B has twice as many rows as A
B=[A A] % the A's are side by side. B has twice as many columns as A.
B=A(1,1) % B is a scalar now, the upper left element of A
B=A'*A % matrix multiplication
B=A(:,1) % B is set to first row of A
B=A.*A % element by element multiplication
B=B./A % element by element division
A=zeros(3,3) % special definition of a matrix of zeros
B=ones(3,1) % defines a matrix of ones
A=eye(5) % defines identity matrix
B=A(1:2,1:3) % takes part of matrix
more on % may not be needed; prevents help screen from scrolling off
help * % shows sample of the help available
Source: Chris Taber, Econ D83 at Northwestern 1996-7, Matlab tutorial handout
Contexts: data
two stage least squares: An instrumental variables estimation technique. Extends the IV idea to a
situation where one has more instruments than independent variables in the model. Suppose one has a
model:
y = Xb + e
Here y is a T x 1 vector of dependent variables, X is a T x k matrix of independent variables, b is a k x 1
vector of parameters to estimate, and e is a k x 1 vector of errors. But the matrix of independent
variables X may be correlated to the e's. Then using a matrix of independent variables Z, uncorrelated to
the e's, that is T x r, where r>k:
Stage 1: By OLS, regress the X's on the Z's to get Xhat = (Z'X)-1Z'y
Stage 2: By OLS, regress y on the Xhat's. This gives an unbiased estimate of b.
The stages can be combined into one for maximum speed:
b = (X'PzX)-1X'Pzy
where Pz, the projection matrix of Z, is defined to be:
Pz = Z(Z'Z)-1Z'
two-factor model: suggests a production model with two factors of production, labor L and capital K.
tying: Tying is the vendor practice of requiring customers of one product to buy others.

Tying can be said to impede trade in that the customer's choices are restricted. If the customer were free
to buy the product without further conditions, the customer would apparently be better off than if the
product has strings attached. Tying could, however, be efficiency-enhancing by (1) reducing the number
of market transactions (an efficiency of scale), or by (2) enabling a work-around of a regulation, such as
offering a bargain in conjunction with a price-controlled product.
A historical example: years ago lessees of IBM mainframes had to agree to buy punch cards only from
IBM. Those punch cards were sold at a higher price than on the open market. So the customer would
have been better off with the same contract minus this clause. But one could argue that tying the
products this way improved competition. It could be that IBM was trying to charge heavy users of the
computer more than light users by putting a surcharge on the punch cards. If so, IBM found a way to bill
customers for one of its costs, computer maintenance. The practice would theoretically encourage
customers to optimize their use of the computer rather than use it excessively. In this case the practice
might be pro-competitive.
Contexts: IO
type I error: That is, 'type one error.' This is the error in testing a hypothesis of rejecting a hypothesis
when it is true.

type I extreme value distribution: Has the cdf F(x)=exp(-exp(-x)).
(Devine and Kiefer write F(x)=exp(-exp(-x)); the difference may be in the range of x? must write this
out)
Source: Amemiya, Takeshi. "Discrete Choice Models," The New Palgrave: Econometrics
type II error: That is, 'type two error.' This is the error in testing a hypothesis of failing to reject a
hypothesis when it is false.

ultimatum game: An experiment. There are two players, an allocator A and a recipient R, who in the
experiment do not know one another. They have received a windfall, e.g., of $1. The allocator, moving
first, proposes to split the windfall by proposing to take share x, so that A receives x and R receives 1-x.
The recipient can accept this allocation, or reject it in which case both get nothing. The subgame perfect
equilibrium outcome is that A would offer the smallest possible amount to R, e.g., the share $.99 for A
and $.01 for R, and that the recipient should accept. The experimental evidence, however, is that A
offers a relatively large share to R, often 50-50, and that R would often reject smaller positive amounts.
We may interpret R's behavior has willingness to pay a cost to punish "unfair" splits. With regard to A's
behavior -- does A care about fairness too? Or is A income-maximizing given R's likely behavior? See
also Dictator Game.
Contexts: game theory; experimental
unbalanced data: In a panel data set, there are observations across cross-section units (e.g. individuals
or firms), and across time periods. Often such a data set can be represented by a completely filled in

matrix of N units and T periods. In the "unbalanced data" case, however, the number of observations per
time period varies. (Equivalently one might say that the number of observations per unit is not always
the same.) One might handle this by letting T be the total number of time periods and N t be the number
of observations in each period.
unbiased: An estimator b of a distribution's parameter B is unbiased if the mean of b's sampling

distribution is B. Formally, if: E[b] = B.

uncertainty: If outcomes will occur with a probability that cannot even be estimated, the decisionmaker
faces uncertainty. Contrast risk.
This meaning to uncertainty is attributed to Frank Knight, and is sometimes referred to as Knightian
uncertainty.
The decisionmaker can apply game theory even in such a circumstance, e.g. the choice of a dominant
strategy.
Kreps (1988), p 31, writes that three standard ways of modeling choices made under conditions of
uncertainty are with von Neumann-Morgenstern expected utility over objective uncertainty, the Savage
axioms for modeling subjective uncertainty, and the Anscombe-Aumann theory which is a middle
course between them.
A recent ad for a new book edited by Haim Levy (Stochastic Dominance: Investment Decision Making
under Uncertainty) considers three ways of modeling investment choices under uncertainty: by tradeoffs
between mean and variance, by choices made by stochastic dominance, and non-expected utility
approaches using prospect theory.
Source: J. Montgomery, social networks paper;

Kreps, 1988
Contexts: models
uncorrelated: Two random variables X and Y are uncorrelated if E(XY)=E(X)E(y). Note that this does
not guarantee they are independent.

under the null: Means "assuming the hypothesis formally being tested is true." See null hypothesis.
over a range which we will denote [a,b]. Pdf is (x-a)/(b-a). Mean is .5*(a+b). Variance is (1/12)(b-a)2.

uniform kernel: The uniform kernel function is 1/2, for -1<u<1 and zero outside that range. Here u=(x-
xi)/h, where h is the window width and xi are the values of the independent variable in the data, and x is
the value of the independent variable for which one seeks an estimate. Unlike most kernel functions this
one is unbounded in the x direction; so every data point will be brought into every estimate in theory,
although outside three standard deviations they make hardly any difference.

uniform weak law of large numbers: See Wooldridge chapter, p 2651. The UWLLN applies to a non-
random criterion function qt(wt,), if the sample average of qt() for a sample {wt} from a random time
series is a consistent estimator for E(qt()).
A law like this is proved with Chebyshev's inequality.

union threat model: "Firms may find it profitable to pay wages above the market clearing level to try to
prevent unionization." In a model this could lead to job rationing and unemployment, just as efficiency
wage models can.
Source: Katz, "Efficiency Wage Theories: A Partial Evaluation" NBER Macro Annual 1986, p 250
Contexts: labor
unit root: An attribute of a statistical model of a time series whose autoregressive parameter is one. In a
data series y[t] modeled by:
y[t+1] = y[t] + other terms
the series y[] has a unit root.
unit root test: A statistical test for the proposition that in a autoregressive statistical model of a time
series, the autoregressive parameter is one. In a data series y[t], where t a whole number, modeled by:
y[t+1] = ay[t] + other terms
where a is an unknown constant, a unit root test would be a test of the hypothesis that a=1, usually
against the alternative that |a|<1.
unity: A synonym for the number 'one'.
Contexts: phrases
univariate: A discrete choice model in which the choice is made from a one-dimensional set is said to
be a univariate discrete choice model.

univariate binary model: For dependent variable y i that can be only one or zero, and a continuous
indepdendent scalar variable x i, that:
Pr(yi=1)=F(xi'b)
Here b is a parameter to be estimated, and F is a distribution function. See probit and logit models for
examples.
unrestricted estimate: An estimate of parameters taken without constraining the parameters. See
"restricted estimate."
upper hemicontinuous: no disappearing points.
urban ghetto: As commonly defined by U.S. researchers: areas where 40 percent or more of residents
are poor.
Source: Blank, _ITAN_, p. 41

Contexts: poverty; data
utilitarianism: A moral philosophy, generally operating on the principle that the utility (happiness or
satisfaction) of different people can not only be measured but also meaningfully summed over people
and that utility comparisons between people are meaningful. That makes it possible to achieve a well-
defined societal optimum in allocations, production, and other decisions, and achieve the goal utilitarian
British philosopher Jeremy Bentham described as "the greatest good for the greatest number."
This form of utilitarianism is thought of as extreme, now, partly because it is widely believed that there
exists no generally acceptable way of summing utilities across people and comparing between them.
Utility functions that can be compared and summed arithmetically are cardinal utility functions; utility
functions that only represent the choices that would be made by an individual are ordinal.
utility curve: synonym for indifference curve.
Contexts: models
utility function: A function which describes an individual agent's preferences. It is a mathematical

relation from various quantitatively measurable goods given to an individual, or attributes of that
individual's environment, and a level of satisfaction that brings to the individual. We have no measure of
the level of satisfaction, or utility level, experienced by the agent but we can make a hypothesis about
the individual's utility function which could then be disproved by the individual's behavior. Because
they *could* be disproved, the utility functions economists normally use have survived something of a
selection process.

A standard utility function is log utility which can be a function of a one-dimensional measure of
consumption or wealth.
Contexts: utility theory
UVAR: Unstructured VAR (Vector Autoregression)
UWLLN: Uniform weak law of large numbers

value added: A measure of output. Value added by an organization or industry is, in principle:
revenue - non-labor costs of inputs
where revenue can be imagined to be price*quantity, and costs are usually described by capital
(structures, equipment, land), materials, energy, and purchased services.
Treatment of taxes and subsidies can be nontrivial.
Value-added is a measure of output which is potentially comparable across countries and economic
structures.
value function: Often denoted v() or V(). Its value is the present discounted value, in consumption or
utility terms, of the choice represented by its arguments.
The classic example, from Stokey and Lucas, is:
v(k) = maxk' { u(k, k') + v(k') }
where k is current capital,
k' is the choice of capital for the next (discrete time) period,
u(k, k') is the utility from the consumption implied by k and k',
 is the period-to-period discount factor,
and the agent is presumed to have a time-separable function, in a discrete time environment, and to
make the choice of k' that maximizes the given function.

VAR: Vector Autoregression, a kind of model of related time series. In the simplest example, the vector
of data points at each time t (y t) is thought of as a parameter vector (say, phi1) times a previous value of
the data vector, plus a vector of errors about which some distribution is assumed. Such a model may
have autoregression going back further in time than t-1 too.
var(): An operator returning the variance of its argument

Contexts: notation
variance: The variance of a distribution is the average of squares of the distances from the values drawn
from the mean of the distribution:
var(x) = E[(x-Ex)2].
Also called 'centered second moment.' Nick Cox attributes the term to R.A. Fisher, 1918.
variance decomposition: In a VAR, the variance decomposition at horizon h is the set of R 2 values
associated with the dependent variable y t and each of the shocks h periods prior.
Source: M.W. Watson, Handbook of Econometrics, Ch 47, p. 2900

Contexts: econometrics; estimation; time series
variance ratio statistic: discussed thoroughly on Bollerslev-Hodrick 1992 p. 19. Equations and
estimation there.
VARs: Vector Autoregressions. "Vector autoregressive models are _atheoretical_ models that use only
the observed time series properties of the data to forecast economic variables." Unlike structural models
there are no assumptions/restrictions that theorists of different stripes would object to. But a VAR
approach only test LINEAR relations among the time series.
Source: Hakkio & Morris: Vector Autoregressions, a User's Guide

Contexts: macro; time series; estimation
vec: An operator. For a matrix C, vec(C) is the vector constructed by stacking all of the columns of C,
the second below the first and so on. So if C is n x k, then vec(C) is nk x 1.
Contexts: econometrics; notation
vega: As used with respect to options: "The vega of a portfolio of derivatives is the rate of change fo the
value of the portfolio with respect to the volatility of the underlying asset." -- Hull (1997) p 328.
Formally this is a partial derivative.
A portfolio is vega-neutral if it has a vega of zero.

Contexts: finance
verifiable: Observable to outsiders, in the context of a model of information.
Models commonly assume that some the values of some variables are known to both of the parties to a
contract but are NOT verifiable, by which we mean that outsiders cannot see them and so references to
those variables in a contract between the two parties cannot be enforced by outside authorities.
Examples: .....

vintage model: One in which technological change is 'embodied' in Solow's language.
Source: Mortensen, Job Reallocation paper, Feb 1997

Contexts: macro
vNM: Abbreviation for von Neumann-Morgenstern, which describes attributes of some utility functions.
Contexts: modelling; micro theory
volatility clustering: In a time series of stock prices, it is observed that the variance of returns or log-
prices is high for extended periods and then low for extended periods. (E.g. the variance of daily returns
can be high one month and low the next.) This occurs to a degree that makes an iid model of log-prices
or returns unconvincing. This property of time series of prices can be called 'volatility clustering' and is
usually approached by modeling the price process with an ARCH-type model.
Source: Bollerslev-Hodrick 92 circa p 8

von Neumann-Morgenstern utility: Describes a utility function (or perhaps a broader class of
preference relations) that has the expected utility property: the agent is indifferent between receiving a
given bundle or a gamble with the same expected value.
There may be other, or somewhat stronger or weaker assumptions in the vNM phrasing but this is a
basic and important one. It does not seem to be the case that such a utility representation is required to
be increasing in all arguments or concave in all arguments, although these are also common assumptions
about utility functions. The name refers to John von Neumann and Oskar Morgenstern's Theory of
Games and Economic Behavior. Kreps (1990), p 76, says that this kind of utility function predates that
work substantially, and was used in the 1700s by Daniel Bernoulli.
Source: Kreps (1990)

Contexts: micro theory; modelling
WACM: abbreviation for the Weak Axiom of Cost Minimization

Contexts: models
wage curve: A graph of the relation between the local rate of unemployment, on the horizontal axis, and
the local wage rate, on the vertical axis. Blanchflower and Oswald show that this relation is downward
sloping. That is, locally high wages and locally low unemployment are correlated.
Source: Blanchflower and Oswald, The Wage Curve, Ch 4

Contexts: labor
wage equation: An equation in which a wage is the dependent variable. Usually this is an empirical,
econometric, linear regression equation. It may however be nonlinear, or an abstract equation within a
structural model.
Contexts: labor economics

Wallis statistic: A test for fourth-order serial correlation in the residuals of a regression, from Wallis
(1972) Econometrica 40:617-636. Fourth-order serial correlation comes up in the context of quarterly
data; e.g., seasonality. Formally, the statistic is:
d4=(sum from t=5 to t=T of: (et-et-4)2/(sum from t=1 to t=T of: et2)
where the series of et are the residuals from a regression.
Tables for interpreting the statistic are in Wallis (1972).

Contexts: time series; econometrics; estimation
Walrasian auctioneer: A hypothetical market-maker who matches suppliers and demanders to get a
single price for a good. One imagines such a market-maker when modeling a market as having a single
price at which all parties can trade.
Such an auctioneer makes the process of finding trading opportunities perfect and cost free; consider by
contrast a "search problem" in which there is a stochastic cost of finding a partner to trade with and
transactions costs when one does meet such a partner.
Contexts: models
Walrasian equilibrium: An allocation vector pair (x,p), where x are the quantities held of each good by
each agent, and p is a vector of prices for each good, is a Walrasian equilibrium if (a) it is feasible, and
(b) each agent is choosing optimally, given that agent's budget. In a Walrasian equilibrium, if an agent
prefers another combination of goods, the agent can't afford it.
Walrasian model: A competitive markets equilibrium model "'without any externalities, asymmetric
information, missing markets, or other imperfections." (Romer, 1996, p 151)
"In this general equilibrium model, commodities are identical, themarket is concentrated at a single
point [location] in space, and the exchange is instantaneous. [Individuals] are fully informed about the
exchange commodity and the terms of trade are known to both parties. [No] effort is required to effect
exchange other than to dispense with the appropriate amount of cash. [Prices are] a sufficient allocative
device to achieve highest value uses." (North, 1990, p. 30.)
Source: Romer, 1996, p 151; North, 1990

Contexts: models
wavelet: A wavelet is a function which (a) maps from the real line to the real line, (b) has an average
value of zero, (c) has values very near zero except over a bounded domain, and (d) is used for the
purpose, analogous to Fourier analysis, implied by the following paragraphs.
Unlike sine waves, wavelets tend to be irregular, asymmetric, and to have values that die out to zero as
one approaches positive and negative infinity. "Fourier analysis consists of breaking up a signal into sine
waves of various frequencies. Similarly, wavelet analysis is the breaking up of a signal into shifted and
scaled versions of the original (or mother) wavelet."
By decomposing a signal into wavelets one hopes not to lose local features of the signal and information
about timing. These contrast with Fourier analysis, which tends to reproduce only repeated features of

the original function or series.
Source: Michel Misiti, Yves Misiti, Georges Oppenheim, Jean-Michel Poggi. MATLAB Wavelet
Toolbox User's Guide, version 1. March 1996. Copyright The Mathworks, Inc. page 1-7.
WE: Walrasian Equilibrium
weak form: Can refer to the weak form of the efficient markets hypothesis, which is that any
information in the past prices of a security are fully reflected in its current price.
Fama (1991) broadens the category of tests of the weak form hypothesis under the name of 'test for
return predictability.'
Source: Fama, 1970

Contexts: finance
weak incentive: An incentive that is does not encourage maximization of an objective, because it is
ambiguous or satisfice-able. For example, payment of weekly wages is a weak incentive since by
construction it does not encourage maximum production, but rather the minimal performance of
showing up every work day. This can be the best kind of incentive in a contract if the buyer doesn't
know exactly what he wants or if output is not straightforwardly measurable. Contrast strong incentive.
Source: Weisbrod's class 5/23/97

weak law of large numbers: Quoted right from Wooldridge chapter:

A sequence of random variables {zt} for t=1,2,... satisfies the weak law of large numbers if these three
conditions hold:
(1) E[|zt|] is finite for all t,
(2) as T goes to infinity, the limit of the average of the first T elements of {z t} 'exists' [unknown: that
means it's fixed and finite, right?],
(3) as T goes to infinity, the probability limit of the average of the first T elements of the series [zt - E
(zt)] is zero.
The most important point (I think) is that the weak law of large numbers holds iff the sample average is
a consistent estimate for the mean of the process.
Laws of large numbers are proved with Chebyshev's inequality.

weak stationarity: synonym for covariance stationarity. A random process is weakly stationary if and
only if it is covariance stationary.
Contexts: statistics; time series; econometrics

weakly consistent: synonym for consistent in the context of evaluating estimators.
weakly dependent: A time series process {xt} is weakly dependent iff these four conditions hold: (1)
{xt} is essentially stationary, that is if E[xt2] is uniformly bounded. In any such process, the following
'variance of partial sums' is well defined, and it will be used in the following conditions. Define T2 to
be the variance of the sum from t=1 to t=T of x t.
(2) T2 is O(T).
(3) T-2 is O(1/T).
(4) The asymptotic distribution of the sum from t=1 to t=T of (x t-E(xt))/T is N(0,1).
These conditions rule out random processes which are serially correlated too positively or negatively or
whose partial sums are near zero. Example 1: An iid process IS weakly dependent. (Domowitz, in class
4/14/97.)
Example 2: A stable AR(1) (||<1) with iid innovations.
Source: Wooldridge, 1995, p 2643-44

weakly ergodic: A stochastic process may be weakly ergodic without being strongly ergodic.
weakly Pareto Optimal: An allocation is weakly Pareto optimal (WPO) if a feasible reallocation would
be strictly preferred by all agents.
WPO <=> SPO if preferences are continuous and strictly increasing (that is, locally nonsatiated).
WebEc: A Web site with indexes to World Wide Web Resources in Economics. Click here to go there.
wedge: The gap between the price paid by the buyer and price received by the seller in an exchange.
Might be caused by a tax paid to a third party.
Weibull distribution: in at least one 'standard' specification, has pdf: f(x)=TxT-1exp(-xT)
where T stands for . T=1 is the simplest case. It looks like the pdf is zero for x<1 in that case.
Weierstrauss Theorem: that a continuous function on a closed and bounded set will have a maximum
and a minimum.

This theorem is often used implicitly, in the assumption that some set is compact, meaning closed and
bounded. Examples that may help clarify:
Example 1: Consider a set which is unbounded, like the real line. Say variable x has any value on the
real line, and we wish to maximize the function f(x)=2x. It doesn't have a maximum or minimum
because values of x further from zero have more and more extreme values of f(x).
Example 2: Consider a set which is not closed, like (0,1). Again, let f(x) be 2x. Again this function has
no maximum or minimum because there is no largest or smallest value of x in the set.
weighted least squares: A way of choosing an estimator. Makes a weighted tradeoff between the error
in an estimator due to bias and that due to variance. Putting equal weights on the two is the mean square
error criterion.
Source: Kennedy, 1992, p. 16

welfare capitalism: welfare capitalism -- the practice of employers' voluntary provision of nonwage
benefits of to their blue collar employees.
Source: Moriguchi, Chiaki. 2000. TITLE?

Contexts: labor; macro; history; comparative; political economy; sociology
WesVar: A software program for computing estimates and variance estimates from potentially
complicated survey data. Made by Westat.
Source: Westat, Inc.

white noise process: a random process of random variables that are uncorrelated, have mean zero, and a
finite variance (which is denoted s2 below). Formally, et is a white noise process if E(et) = 0, E(et2) = s2,
and E(etej) = 0 for t<>j, where all those expectations are taken prior to times t and j. A common, slightly
stronger condition is that they are independent from one another; this is an "independent white noise
process." Often one assumes a normal distribution for the variables, in which case the distribution was
completely specified by the mean and variance; these are "normally distributed" or "Gaussian" white
noise processes.
Contexts: econometrics; finance; statistics; models
White standard errors: Same as Huber-White standard errors.
Wiener process: A continuous-time random walk with random jumps at every point in time (roughly
speaking).

window width: Synonym for bandwidth in the context of kernel estimation
Contexts: econometrics, nonparametrics
winner's curse: That a winner of an auction may have overestimated the value of the good auctioned.
"The winner's curse arises in an auction when the good being sold has a common value to all the bidders
(such as an oil field) and each bidder has a privately known unbiased estimate of the value of the good
(such as from a geologist's report): the winning bidder [may] be the one who most overestimated the
value of the good; this bidder's estimate itself may be unbiased but the estimate conditional on the
knowledge that it is the highest of n unbiased estimates is not." -- Gibbons and Katz
Source: Gibbons and Katz, "Layoffs and Lemons", Journal of Labor Economics, 1991
Contexts: game theory; auctions
WIPO: World Intellectual Property Organization, a component of the WTO agreement.
Contexts: intellectual property; organizations
within estimator: synonym for fixed effects estimator
WLLN: Weak law of large numbers
WLOG: abbreviation for "without loss of generality". This phrase is relevant in the context of a proof or
derivation in which the notation becomes simpler, or there are fewer cases to demonstrate, by making an
innocuous assumption, for example that the data are in a certain order.
Contexts: mathematics; proofs
Wold decomposition: Any zero mean, covariance stationary process can be represented as a moving
average sum of white noise processes plus a linearly deterministic component that is a function of the
index t. That form of expressing the process is its Wold decomposition. Clear expression of this idea
requires an equation or two that cannot be put here yet.
Source: Hamilton, p. 109

Wold's theorem: That any covariance stationary stochastic process with mean zero has a moving
average representation, called its Wold decomposition. Let {xt} be that process. See Sargent, 1987, p
286-288 for the complete theorem, assumptions, and proof.
Source: Sargent, 1987, p 286-288

Contexts: macro; time series; econometrics; statistics
World Bank: A collection of international organizations to aid countries in their process of economic
development with loans, advice, and research. It was founded in the 1940s to aid Western European
countries after World War II with capital.

Click here to go to the World Bank web site.
world systems theory: [What follows is the editor's best understanding, but not definitive.] A category
of sociological/historical description and analysis in which aspects of the world's history are thought of
as byproducts of the world being an organic whole. Key categories are core and periphery. Core
countries, economies, or societies are richer, have more capital-intensive industry, skilled labor and
relatively high profits. In a way they exploit the poorer peripheral societies but it may not be a deliberate
collusion.
Source: Gray's review of O'Hearn's book at http://www.eh.net/BookReview, first paragraph.

http://eh.net/bookreviews/library/0595.shtml
WPO: stands for Weakly Pareto Optimal
X-11 ARIMA: A nonparametric method or program for seasonal adjustment, developed at the Census
Bureau, and used by US national agencies such as the Federal Reserve.
Source: conversations with Ish, Jan 18, 2004; Stuart Scott, Aug 2, 2005
X-inefficiency model: A model in which there is a best-practice technology, and a unit (firm or country,
for example) either has that technology or one not as good. No random factor could make a firm's
production function better than that best-practice one. An organization is perfectly x-efficient if it
produces the maximum output possible from its inputs? Or is there some connection between its choice
of output levels and types and its x-efficiency? Sources of x-inefficiency discussed in the academic
literature: n inertia in process; that is, doing things to minimize internal redesign from the way they were
done last time, rather than in the most efficient way for current circumstances In prisoner's dilemma
situations where an individual's effort is unobservable; lack of trust and lack of communication can
contribute to this. It is hard for any individual to coordinate the agreement necessary to raise effort.
(Leibenstein, Sept 1983 AER comment.) In Absence of knowledge (I haven't seen this discussed but it
has to be out there.)
Source: Leibenstein and others

Contexts: IO
yellow-dog contract: A requirement by a firm that the worker agree not to engage in collective labor
action. Such contracts are not enforceable in the U.S.
Source: Katz, "Efficiency Wage Theories...", NBER Annual 1986, p 250

Contexts: labor
zero-sum game: A game in which total winnings and total losings sum to zero for each possible
outcome.

Economic Glossary

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Glossary of research economics Page 1 of 236

Contexts: econometrics; estimation

Contexts: econometrics; estimation

A-D equilibrium: abbreviation for Arrow-Debreu equilibrium.

absolute risk aversion: An attribute of a utility function. See Arrow-Pratt measure.

Contexts: micro theory; finance

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This term comes from Cohen and Levinthal (1990).

Source: Davidson and MacKinnon, 1993, p 78-79

ACIR: Advisory Council on Intergovernmental Relations, in the U.S.

Source: John P. Martin, D16 readings book

Contexts: statistics; econometrics

AEA: American Economics Association

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AER: An abbreviation for the American Economic Review.

Source: Milgrom and Weber, Econometrica, 1982, p 1096.

Contexts: real analysis

Source: Tirole, p 136

Contexts: data; labor

Contexts: public finance; labor

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Source: Penson, Capps, and Rosson, 1996; Hallam, 1998

AIC: abbreviation for Akaike's Information Criterion

Contexts: econometrics; time series; estimation

AJS: An abbreviation for the American Journal of Sociology.

Source: Watson's compressed notes, p. 23; RATS maual pg. 5-18

Contexts: probability; statistics; econometrics

Source: Davidson and MacKinnon, 1993, p 78-79

Americanist: A member of a certain subfield of political science.

Contexts: political science

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AMEX: American Stock Exchange, which is in New York City

aML: A programming language/environment for maximum likelihood estimation, allowing complicated

Amos: A statistical data analysis program, discussed at http://www.smallwaters.com/amos.

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Source: Stata manuals; Kennedy, 1992

The APT includes multiple risk factors, unlike the CAPM.

Source: Sargent, 1987, p 112; Ross, 1976

Contexts: time series; econometrics; statistics

AR(1): A first-order autoregressive process. See AR for details.

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Source: Engle, 1982

Source: Enders, 1996, p 23

Source: Enders, 1996, p 23

Source: Used in Rosenberg (1996) in Mosaic of Economic Growth.

Source: Debreu; Arrow and Debreu, 1954

Arrow-Pratt measure: An attribute of a utility function.

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ASR: An abbreviation for the journal American Sociological Review.

Source: Fama, 1991, p 1590-1599

Source: Sargent, 1987, Ch 3

asymptotic: An adjective meaning 'of a probability distribution as some variable or parameter of it

asymptotic normality: A limiting distribution of an estimator is usually normal. (details!)

asy var(t_hat) = (1/n) * limn->infinity E[ {t_hat - limn->infinity E[t_hat] }2 ]

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Source: Greene, 1993, p 109

Source: Greene, 1993, p 107

Source: J. Montgomery, social networks paper

Source: Greene, 1997

Source: Walker's essay at http://econlib.org/library/Enc/AustrianEconomics.html

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autocorrelation: the jth autocorrelation of a covariance-stationary process is defined as its jth

Below is Gauss code to calculate autocorrelations from a sample.