Title: Model Averaging and its Use in Economics,
Abstract: The method of model averaging has become an important tool to deal with model
uncertainty, for example in situations where a large amount of different
theories exist, as are common in economics. Model averaging is a natural and
formal response to model uncertainty in a Bayesian framework, and most of the
paper deals with Bayesian model averaging. The important role of the prior
assumptions in these Bayesian procedures is highlighted. In addition,
frequentist model averaging methods are also discussed. Numerical methods to
implement these methods are explained, and I point the reader to some freely
available computational resources. The main focus is on uncertainty regarding
the choice of covariates in normal linear regression models, but the paper also
covers other, more challenging, settings, with particular emphasis on sampling
models commonly used in economics. Applications of model averaging in economics
are reviewed and discussed in a wide range of areas, among which growth
economics, production modelling, finance and forecasting macroeconomic
quantities.