Welcome to Econometrics

Introduction

Why study Econometrics?

An empirical analysis uses data to test a theory or to estimate a relationship A formal model can be tested
Theory may be ambiguous as to the effect of some policy change can use econometrics to evaluate the program
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Steps in Empirical Analysis

Careful formulation of the question of interest Economic Model or Informal Economic Intuition or Reasoning Turn an Economic Model into an Econometric Model State Hypothesis of Interest Data Estimation Testing of Hypothesis
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Types of Data Cross Sectional

Cross-sectional data is a random sample
Each observation is a new individual, firm, etc. with information at a point in time

If the data is not a random sample, we have a sample-selection problem

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Types of Data Cross Sectional

Types of Data Cross Sectional

Types of Data Time Series

Time series data has a separate observation for each time period e.g. stock prices Since not a random sample, different problems to consider
Trends and seasonality will be important
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Types of Data Time Series

Types of Data Pooled Crosssections and Panel

Can pool random cross sections and treat similar to a normal cross section known as pooled cross-sections data. Will just need to account for time differences.
Can follow the same random individual observations over time known as panel data
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Types of Data Pooled Crosssections

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Types of Data Panel

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The Question of Causality

Simply establishing a relationship between variables is rarely sufficient Want to the effect to be considered causal If weve truly controlled for enough other variables, then the estimated ceteris paribus effect can often be considered to be causal Can be difficult to establish causality
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Example: Returns to Education

A model of human capital investment implies getting more education should lead to higher earnings In the simplest case, this implies an equation like

Earnings 0 1education u
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Example: (continued)
The estimate of 1, is the return to education, but can it be considered causal? While the error term, u, includes other factors affecting earnings, want to control for as much as possible Some things are still unobserved, which can be problematic
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