[The widespread use of prior information in formulating, estimating, and using econometric models is reviewed. Attempts to avoid the use of prior information by formulating multivariate statistical VAR and ARMA time series models for economic time series data have resulted in heavily over-parametrized models. A simple demand, supply, and entry model is presented to contrast models utilizing prior information provided by economic theory and other sources with multivariate statistical time series models. Formal Bayesian methods for incorporating prior information in econometric estimation, testing, and prediction are presented. A number of published applied Bayesian studies are cited in which Bayesian methods have proved to be effective. It is concluded that wise use of the Bayesian approach will produce improved econometric results.]

USUAL SPECIFYING ASSUMPTIONS for simultaneous equation econometric models imply strong inequality constraints on structural parameters which are formally similar to those encountered in connection with the classical errors-in-the-variables model.2 To illustrate, consider the following simple simultaneous equation model for two endogenous variables, Y,, and Y2t, say price and quantity, respectively:

In previous work (Zellner, 1978) structural coefficient estimates that minimize the posterior expectation of a generalized quadratic loss function were derived. On computing these minimum expected loss (MELO) estimates for coefficients of Klein's Model I and the Girschick-Haavelmo supply and demand model for food, it was found that the MELO coefficient estimates have values between corresponding direct least squares (DLS) and two stage least squares (2SLS) estimates (see Zellner and Park, 1979). This note explores the relation of MELO, DLS and 2SLS estimates. Below it is shown,that the MELO estimate of a vector of coefficients of endogenous variables in an equation of a linear, interdependent econometric model can be expressed as a matrix weighted average of the DLS and 2SLS estimates. In the scalar case, the MELO estimate can be expressed as a simple weighted average of the DLS and 2SLS estimates. Some properties of these matrix weighted averages are discussed using the results in Chamberlain and Leamer (1974).

CONSUMPTION has been cast as both villain and hero in the 1948-49 recession in the United States. It has been asserted that a weakening of consumption was important in accounting for the downturn. R. A. Gordon cites the levelling off of consumer demand as one of several factors responsible for the downturn.1 D. Hamberg has suggested an underconsumptionist explanation of the downturn.2 Even C. A. Blyth who set out to prove that the most important cause of the I948-I949 recession was a substantial fall in fixed investment . felt compelled to state in his conclusions, I accept the view that a reduced rate of growth in consumption both domestically and in the export trade in I948 caused unplanned inventory accumulation, which induced a fall in production of certain nondurables and consumer durables.3 Further, it has been argued that it was the strength of consumption which at least in part accounted for the mildness of the I949 recession. R. Fels asserts that an upward shift in the consumption function occurred in I949 which, along with continuing high levels of autonomous investment and government expenditures, accounted for the mildness of the recession.4 R. A. Gordon had adopted a similar view earlier, both with respect to the mitigating effects of the maintenance of a high level of consumption and to the strength of autonomous investment and government expenditures, although he makes no explicit reference to a shift of the consumption function.5 Hamberg points to the secular rise in the consumption function, deferred consumer replacement demand, and high levels of autonomous investment as factors explaining why this recession failed to develop into a major downturn.6 Blyth cites the continued rise in consumption during I949 as one among several factors which modified the recession.7 Since consumption figures largely in explanations of the I948-49 cycle, and in fact appears called upon to play a dual role, it may be useful to direct careful inquiry into determining what influences prompted consumption to behave as it did.