In Chapter 4, it was suggested that the EBCT's econometric strategy is a child of the Cowles Commission method, since the EBCT shares with the latter essentially the same econometric methodology, which explicitly admits the role of a priori economic theory in statistical inferences from data. But what differentiates the EBCT from its historical precedecessor is its firm adherence to the optimization foundation. Although Haavelmo and Koopmans preferred equilibrium theory as the basis for the construction of an econometric system, in which the individual's optimizing behavior is assumed to provide basic explanations of economic phenomena, the Cowles Commission as a whole was not clear about how to implement this theory in actual empirical work. It might be said that the EBCT's econometric strategy, the hallmark of which is the use of cross-equation restrictions directly derived from the setting of dynamic optimization, is one possible solution to this problem.

The EBCT, like its forerunner, is not immune to criticism, some of which is discussed in this chapter. However, the criticisms that have been leveled against it also represent important alternatives to the EBCT in the contemporary scene. Not surprisingly, it will be seen that the current dispute about econometric methodology is a revival of the old methodological controversies that existed early in the econometric movement. The first section of this chapter presents an expository formulation of the EBCT's econometric strategy. In the second section, Sims's criticism of and his alternative methodological position to the EBCT are discussed. The final section deals with Hendry's econometric methodology, which, though sound and plausible, is not very familiar to American econometricians.