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Applied Econometric Analysis

Lecture 1

What is Econometrics

Econometrics is based upon the development of statistical


methods for estimating economic relationships, testing
economic theories, and evaluating and implementing
government and business policy.

The applications of econometrics include


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Forecasting macroeconomic variables like interest rates,


inflation rates, Gross domestic product etc

We can study the effects of political campaign expenditures on


voting outcomes.

We can consider the effect of school spending on student


performance in the field of education.

Applications
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Title: The Market Impacts of Pharmaceutical Product


Patents in Developing Countries: Evidence from India
(American Economic Review, 2016, 106(1): 99-135) by Mark
Duggan, Craig Garthwaite and Aparajita Goyal.

Abstract: In 2005, as the result of a World Trade Organization


mandate,India implemented a patent reform for pharmaceuticals
that was intended to comply with the 1995 Trade-Related Aspects
of Intellectual Property Rights (TRIPS). Exploiting variation in the
timing of patent decisions, we estimate that a molecule receiving a
patent experienced an average price increase of just 3-6
percent,with larger increases for more recently developed molecules
and for those produced by just one firm when the patent system
began. Our results also show little impact on quantities sold or on
the number of pharmaceutical firms operating in the market.

Title: Are Sticky Prices Costly? Evidence from the Stock


Market (American Economic Review, 2016, 106(1): 165-199)
by Yuriy Gorodnichenko and Michael Weber.

Abstract: We show that after monetary policy announcements, the


conditional volatility of stock market returns rises more for firms
with stickier prices than for firms with more flexible prices. This
differential reaction is economically large and strikingly robust to a
broad array of checks. These results suggest that menu
costs-broadly defined to include physical costs of price adjustment,
informational frictions,etc.-are an important factor for nominal price
rigidity at the micro level. We also show that our empirical results
are qualitatively and, under plausible calibrations, quantitatively
consistent with New Keynesian macroeconomic models in which
firms have heterogeneous price stickiness.

Title: Where is the Land of Opportunity? The Geography of


Intergenerational Mobility in the United States (Quarterly
Journal of Economics, 2014, 129(4): 1553-1623) by Raj
Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel
Saez.

I Abstract: We use administrative records on the incomes of more than 40

million children and their parents to describe three features of


intergenerational mobility in the United States. First, we characterize the
joint distribution of parent and child income at the national level. The
conditional expectation of child income given parent income is linear in
percentile ranks. On average, a 10 percentile increase in parent income is
associated with a 3.4 percentile increase in a childs income. Second,
intergenerational mobility varies substantially across areas within the U.S.
For example, the probability that a child reaches the top quintile of the
national income distribution starting from a family in the bottom quintile
is 4.4% in Charlotte but 12.9% in San Jose. Third, we explore the factors
correlated with upward mobility. High mobility areas have (1) less
residential segregation, (2) less income inequality, (3) better primary
schools, (4) greater social capital, and (5) greater family stability. While
our descriptive analysis does not identify the causal mechanisms that
determine upward mobility, the publicly available statistics on
intergenerational mobility developed here can facilitate research on such

Title: Up in Smoke: The Influence of Household Behavior on


the Long-Run Impact of Improved Cooking Stoves (AEJ:
Economic Policy, forthcoming) by Esther Duflo, Rema Hanna
and Michael Greenstone

I Abstract: It is conventional wisdom that it is possible to reduce exposure to


indoor air pollution, improve health outcomes, and decrease greenhouse gas
emissions in rural areas of developing countries through the adoption of
improved cooking stoves. This is largely supported by observational field studies
and engineering or laboratory experiments. However, we provide new evidence,
from a randomized control trial conducted in rural Orissa, India (one of the
poorest places in India) on the benefits of a commonly used improved stove that
laboratory tests showed to reduce indoor air pollution and require less fuel. We
track households for up to four years after they received the stove. While we
find a meaningful reduction in smoke inhalation in the first year, there is no
effect over longer time horizons. We find no evidence of improvements in lung
functioning or health and there is no change in fuel consumption (and
presumably greenhouse gas emissions). The difference between the laboratory
and field findings appears to result from households revealed low valuation of
the stoves. Households failed to use the stoves regularly or appropriately, did
not make the necessary investments to maintain them properly, and usage rates
ultimately declined further over time. More broadly, this study underscores the
need to test environmental and health technologies in real-world settings where
behavior may temper impacts, and to test them over a long enough horizon to
understand how this behavioral effect evolves over time.

Why econometrics as a separate discipline ?

(Source: Lecture notes by Jaap H. Abbring)


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The existence of econometrics as a separate discipline is


justified by the fact that that statistics alone does not provide
answer interesting economic questions.

Unlike some of the natural sciences, economic problems


cannot be analyzed in controlled and experimental methods.

Economic theory can be used to provide additional structure


to analyze the data.

(Source: Lecture notes by Jaap H. Abbring)


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Example: A lot of research focuses on the disadvantageous


position of African-Americans in the USA in terms of
employment, income and education. One may conjecture that
discrimination is the cause of less income for the
African-Americans.

Human capital theory in economics predicts that given the


same level of human capital accumulation, people are like to
earn equally.

So one may take data of people with equal education and see
if there is really low income for African-Americans or not.

But the data set may not be proper. The reason is that
economic theory tells discrimination induces people to invest
less in education and experience.

So the overall wage differential between blacks and whites


should be taken to account rather than the conditional wage
differential.

(Source: Lecture notes by Jaap H. Abbring)


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The black-white median wage differential has narrowed from


50% in 19040s to 30% in 1980s (example taken from
Heckmans 2000 Nobel lecture).

This seems to suggest that there is improvement in the


position of the blacks in the USA.

But it may be the case that black people have dropped out of
labor force at a much higher rate that the white people in this
period and we may get this anomaly in the data analysis.

If we correct for this dropout, then Heckman points out that


there is no improvement in the position of blacks.

Statistics is agnostic about a correction for selection into


employment.

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