What is Econometrics? Why Study Econometrics? The Nature of Econometrics and Economic Data Steps in an Empirical Analysis The Structure of Economic Caio Vigo Data Causality and the Notion of The University of Kansas Ceteris Paribus Department of Economics Fall 2019 These slides were based on Introductory Econometrics by Jeffrey M. Wooldridge (2015) 1 / 38
Topics What is Econometrics? Why Study Econometrics? Steps in an 1 What is Econometrics? Empirical Analysis Why Study Econometrics? The Structure of Economic Data 2 Steps in an Empirical Analysis Causality and the Notion of Ceteris Paribus 3 The Structure of Economic Data 4 Causality and the Notion of Ceteris Paribus 2 / 38
What is Econometrics? What is Econometrics? Why Study Econometrics? Steps in an Empirical Analysis • Econometrics is the set of tools by which economists, and others in the social The Structure sciences, analyze data. We can use econometrics to: of Economic Data • Estimate economic relationships; Causality and the Notion of • Test economic theories; Ceteris Paribus • Evaluate government and business policy. 3 / 38
What is Econometrics? What is Econometrics? Why Study Econometrics? Econometrics focuses on problems inherent in analyzing data generated by Steps in an individuals, firms, and other entitities acting strategically, and interacting with one Empirical Analysis another. The Structure of Economic Data • For example: Causality and the Notion of Ceteris • Does higher school spending is related with higher SAT/ACT scores? Paribus • What are the effects to the US economy if we raise our tariffs? • What is the effect of a 20-week training program on worker’s hourly wage? • What are the effects on crime rates if we legalize marijuana? 4 / 38
What is Econometrics? What is Econometrics? Why Study Econometrics? Steps in an Empirical • A simple correlation analysis might not be sufficient because causality can be Analysis difficult to infer. The Structure of Economic Data • In economics, theory and empirical analysis are both important. Causality and the Notion of Ceteris • An empirical analysis uses data to test a theory, estimate an economic Paribus relationship, or determine the effects of a policy or intervention. Econometrics allows us to analyze data using formal statistical methods. 5 / 38
What is Econometrics? What is Econometrics? Why Study Econometrics? Steps in an Empirical Analysis The Structure of Economic Data Causality and the Notion of Ceteris Paribus 6 / 38
Is Econometrics = Statistics? What is Econometrics? Why Study Econometrics? Steps in an • Econometrics is its own discipline (separate from statistics) mainly because there Empirical Analysis exists the following difference: The Structure of Economic Data Causality and the Notion of Ceteris Experimental Data � = Nonexperimental Data Paribus 7 / 38
Is Econometrics = Statistics? What is Econometrics? Why Study Econometrics? Steps in an Empirical • Experimental data: Analysis The Structure of Economic • Data from controlled experiments; Data Causality and • Common in the natural sciences (physics, chemistry, ...) and in the biomedical the Notion of Ceteris fields; Paribus • However, harder to find or generate in the social sciences (although some exist). 8 / 38
Is Econometrics = Statistics? What is Econometrics? Why Study Econometrics? • Nonexperimental data Steps in an Empirical Analysis • These are data sets collected in a passive manner, after we observe outcomes on The Structure of Economic individuals, firms, schools, and so on. Data Causality and the Notion of • We just “observe” the data without having any control over it,i.e., we simply Ceteris Paribus act as “observers”of what has happened and then try to learn from what we observe. • Other names for nonexperimental data: observational or retrospective data. 9 / 38
Why Study Econometrics? What is Econometrics? Why Study Econometrics? Steps in an Empirical • Important to be able to apply economic theory to real world data. Analysis The Structure of Economic • Theory may be ambiguous as to the effect of some policy change, and in any case Data theory rarely tells us how large the effect might be. Causality and the Notion of Ceteris Paribus • Forecasting economic variables (inflation, interest rates, housing starts, and so on) is important, too. 10 / 38
Topics What is Econometrics? Why Study Econometrics? Steps in an 1 What is Econometrics? Empirical Analysis Why Study Econometrics? The Structure of Economic Data 2 Steps in an Empirical Analysis Causality and the Notion of Ceteris Paribus 3 The Structure of Economic Data 4 Causality and the Notion of Ceteris Paribus 11 / 38
Steps for a Successful Empirical Study What is Econometrics? Why Study Econometrics? Steps for a Successful Empirical Study Steps in an Empirical Analysis Step 1: Carefully pose a question. The Structure of Economic Data Step 2: Specify an economic or conceptual model. Causality and the Notion of Ceteris Step 3: Turn the economic model into an econometric model. Paribus Step 4: Collect data on the variables and use statistical methods to estimate the parameters, construct confidence intervals for the parameters, and test hypotheses. 12 / 38
Step 2. Specify an economic model What is Econometrics? Step 2. Specify an economic model , or at least a conceptual model, to study the Why Study Econometrics? phenomenon of interest. Formal economic modeling (such as utility maximizaton) is Steps in an Empirical often used, but one can get by with careful economic reasoning that is less formal. Analysis The Structure Example of Economic Data To study the effects of job training on worker productivity, where productivity is Causality and measured by observed hourly wage, we can start with an equation such as the Notion of Ceteris Paribus wage = f ( educ, exper, training ) where educ is a measure of schooling, exper is a measure of workforce experience, and training is a measure of time spent in job training (the variable of most interest). 13 / 38
Step 3: Turn the economic model into an econometric model What is Econometrics? Why Study Example Econometrics? Steps in an We can specify an econometric model for the wage/job training example as Empirical Analysis The Structure wage = β 0 + β 1 educ + β 2 exper + β 3 training + u of Economic Data Causality and the Notion of Ceteris Paribus • The constants β 0 , β 1 , β 2 , and β 3 (“the betas”) are the parameters of the model, and it is these (especially β 3 in this example) that we hope to estimate. • Ideally we will be able to collect data on wage , educ , exper , and training from a large group of working people. 14 / 38
Step 3: Turn the economic model into an econometric model What is Econometrics? • The last term in the equation Why Study Econometrics? Steps in an wage = β 0 + β 1 educ + β 2 exper + β 3 training + u Empirical Analysis The Structure of Economic is u . It’s called the error term or disturbance . Data Causality and the Notion of • It plays a very important role in econometrics. Ceteris Paribus • It represents all other factors that can affects someone’s wage, including native intelligence, motivation, and so on. • The error term can also capture measurement problems in one or more of the variables. 15 / 38
Step 3: Turn the economic model into an econometric model What is Econometrics? Why Study Econometrics? Steps in an Empirical • We will want to use statistical methods, and data, to estimate and test hypotheses Analysis about the parameters . The Structure of Economic Data • For example, the hypothesis that job training has no effect on wage is β 3 = 0 . Causality and the Notion of Ceteris Paribus • The hypothesis that one year of experience is worth one year of education is β 1 = β 2 . 16 / 38
Steps for a Successful Empirical Study What is Econometrics? Why Study Econometrics? Steps in an Empirical Step 1: Carefully pose a question. Analysis The Structure Step 2: Specify an economic or conceptual model. of Economic Data Causality and Step 3: Turn the economic model into an econometric model. the Notion of Ceteris Paribus Step 4: Collect data on the variables and use statistical methods to estimate the parameters, construct confidence intervals for the parameters, and test hypotheses. 17 / 38
Topics What is Econometrics? Why Study Econometrics? Steps in an 1 What is Econometrics? Empirical Analysis Why Study Econometrics? The Structure of Economic Data 2 Steps in an Empirical Analysis Causality and the Notion of Ceteris Paribus 3 The Structure of Economic Data 4 Causality and the Notion of Ceteris Paribus 18 / 38
The Structure of Economic Data What is Econometrics? Why Study Econometrics? • Economic data sets come in a variety of types. Steps in an Empirical Analysis Types of Economic Data The Structure • Cross-Sectional Data of Economic Data Causality and • Time Series Data the Notion of Ceteris Paribus • Pooled Cross Sections • Panel or Longitudinal Data 19 / 38
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