Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world August 29, 2018 Introduction and Overview ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world Why are we here? Haavelmo(1944): to “become master of the happenings of real life.” ◮ “Theoretical models are necessary tools in our attempts to understand and explain events in real life. ... Whatever be the ‘explanations’ we prefer, it is not to be forgotten that they are all our own artificial inventions in a search for an understanding of real life; they are not hidden truths to be ‘discovered.’ ” ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world The point of empirical work is to tell stories that matter to us ◮ Understanding concrete developments ion the world around us ◮ Providing useful guides for action ◮ Persuading others ◮ Not technique! Every economic story we might want to tell has some reflection in data we can observe. ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world Our goal is to answer questions posed to us by the world ◮ to advance a political project ◮ to design a policy ◮ to make money Judgements of relevance or importance cannot be made from within economics, but only from some outside vantage point. ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world The map is not the territory Economic data is the product of some social process ◮ Concrete social activity comes, through a series of specific activities, to be represented in quantitative form ◮ Heterogeneous human activity and its products are classified into discrete categories ◮ Market transactions are recorded, then grouped into accounts ◮ Private accounts are reported to public authorities in standardized form ◮ Survey are conducted, and results compiled ◮ Quantities like output or profit or the price level are not preexisting objects in the world, but come into being through particular accounting practices ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world ◮ Products of all this activity comes to us as data, which we select from, assemble, transform through various statistical techniques ◮ One important set of techniques is to summarize the variation in the data in terms of a limited set of parameters. Standard statistical distributions are a useful tool for this. ◮ always keep in mind that distributions are tools for describing data, not objects existing independently in the world. ◮ We use these summaries to describe historical developments, tell stories, make and evaluate causal claims ◮ This activity then gets generalized as economic theory ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world Econometrics Econometrics is one set of tools for organizing data and bringing it into relation with economic theory It is just one set of tools among others! ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world Econometrics starts from premises ◮ The data we see is a reflection of a genuine economic process ◮ This data is drawn from an underlying population ◮ Variables in that population have their own well-defined statistical distributions ◮ The variables are causally linked in such a way that we can regard one of them (the dependent variable) as a function of a set of others (the independent variables) plus a random error term ◮ We can draw repeated samples from the same population ◮ in the ideal case with identical values of the independent variables ◮ So there is a data generating process with stable properties which we can describe statistically ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world What does a regression do? ◮ Seeks to establish the effect of a ceteris paribus change in an independent variable on a dependent variable ◮ ... by looking at the variation shared by those variables that is not shared with other (independent) variables ◮ Express this as an equation in which the dependent variable is a (linear) function of the independent variables plus an error term ◮ Assesses the relationship between the dependent and independent variables by comparing it to hypothetical null of no relationship... ◮ Strictly speaking in econometrics we don’t test our own claims, we test the null and treat rejection of the null as evidence for our preferred hypothesis ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world ◮ ... on the basis of an assumed distribution of the error term ◮ Often focus on qualitative question of whether observed distribution is “far enough” from the null hypothesis ◮ Sometimes, main finding is the estimated parameter value, often it is simply that a variable was “significant” or “not significant” ◮ Only qualitative results possible in common case where independent variable used is supposed to be a proxy or instrument for true variable of interest... ◮ ... or where independent variable is indicator rather than numerical ◮ Treats link between independent and dependent variable as black box – we are only observing variation at beginning and end of causal chain ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world People doing regressions worry about: ◮ Specification ◮ Identification ◮ Endogeneity ◮ Distribution of the error term ◮ Heteroskedasticity ◮ Kurtosis ◮ Independence (from independent variables and each other) ◮ External validity ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world Econometrics Sometimes a regression is the best approach: ◮ We are confident about the relationship between data we observe and underlying relationship we are interested in ◮ There’s well-defined population that our sample is drawn from ◮ The question we are interested in is causal ... ◮ ... and is about effect of a cause rather than cause of an effect ◮ Accepting or rejecting the null hypothesis of no relationship answers an interesting question... ◮ Negative answers (accepting the null) are more often interesting than positive ones ◮ ... and/or we can interpret the coefficients quantitatively. ◮ The ceteris paribus (“all else equal”) assumption makes sense ◮ Reasonably direct link between the variables ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world For example: ◮ Synthetic control studies of minimum wage laws ask what happened to employment in a jurisdiction that raised the minimum wage compared with employment in comparable jurisdictions with similar employment trends that did not raise the minimum ◮ We are comparing one place and time to a well defined population of other places ◮ We are interested in effect of minimum wage change , not cause of employment change ◮ The qualitative question “were there fewer jobs?” is an interesting one ◮ It makes sense to think of the minimum wage increase as a distinct event that could be different without anything else changing ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Why are we here? Econometrics The limits of econometrics Alternatives to econometrics Empirical work in real world ◮ Herndon (2017) compares defaults losses on low documentation mortgages (“liar’s loans”) with losses on otherwise similar conventional loans ◮ There is a well-defined population of mortgage loans issued in the given period ◮ Knowing whether default rates were significantly higher in the absence of documentation is a little interesting.... ◮ ... and the study also tells us how much additional default losses were incurred on low-documentation loans ◮ Comparing the experience of a low-documentation loan to the counterfactual of a conventional loan issued to an apparently similar borrower in the time period makes sense ◮ There is no ambiguity about the mechanism linking absent documentation to higher default rates ECO 752 Research Methods II - Fall 2018 - 8/29/2018
Recommend
More recommend
