Econometrics helps better manage economic and financial activity

What effect could a five per cent reduction in personal income tax rates have on levels of consumption and savings in Canadian households? What impact might a one‑half per cent increase in the Bank of Canada’s key interest rate have on inflation and the economy? These are the kinds of questions being answered by econometrics—a field applying both mathematical and statistical analyses to economics.

“I like working in this field because it has practical, real-life applications,” says Jean‑Marie Dufour, a subject-matter expert and professor of economic science at McGill University. Several of his projects analyzing macroeconomic and financial data sets have been funded by the Social Sciences and Humanities Research Council.

“In order to make informed decisions in the area of economic policy, it is important to measure, to explain and to predict both economic and financial phenomena,” he says. “This is what drives my interest in developing mathematical models and methodological tools those approximate—as much as possible—contemporary economic realities, themselves in a state of continual flux.”

With his particular expertise, it is easy to understand not only why Dufour figures so prominently in the Bank of Canada’s list of collaborators, but also why the Bank awarded him its prestigious Fellowship Award in 2012. The econometric models Dufour designed, for example, are capable of more accurately measuring how Canada’s monetary policy influences inflation rate, financial markets and the economic climate.

In the context of an increasingly complex, ever-changing economy, governments, businesses and financial analysts are all looking for ways to more effectively manage the risks associated with economic activities. By offering analytical tools to better understand financial market data, econometrics leverages statistics to avoid pitfalls.

As consumers, it is hard to imagine that this jumble of numbers and statistics can have such an impact on our lives and on the smooth functioning of the Canadian economy, but they definitely do.