Step by step

ECONOMETRIC
MODELLING
Nasrudin
Politeknik Statistika STIS
 Econometrics Quotes

Dear past, thank you for all the lessons.

Dear future, I am ready.

Don't let us use a method inappropriately,

as Zorro is wrong in wearing a mask
Agenda
01 Econometrics

02 Econometric Model

Econometric Modelling:
03 Step by step

04 Discussion
 Let look at Scimagojr

AWESOME
SLIDE
Case 1 Sales predicted by sales pattern Case 2 Sales predicted by other
in the past variables that affect it

https://exceldashboardschool.com/sales-forecast-chart/

https://www.sganalytics.com/blog/choosing-right-price-elasticity-model/

SALEt = a + b.SALEt-1 +et SALEt = a + b.PRICEt +et

SALEt = a + b.t + c.t2+et SALEt = a + b.PRICEt +c.ADVt+et
Econometrics
Econometrics is the unification of economic theory,
statistics and mathematics .
— Ragnar Frisch, quoted in: Warren Page (2013) Applications of
Mathematics in Economics. p. 75

Econometrics Time Series

(Classical) Econometrics
Econometrics is the integration of
economics, mathematics and statistics
02
for the purpose of providing numerical
values for the parameters of economic
relationships ….. (Koutsoyianis, 1977)
Regression
- Deals with the measurement of
economic relationships
Parameter intepretation (β) more
important than prediction (Y^)
- Based on theory
Koutsoyianis (1977), Baltagi (2006;
2011), Greene (2012), Woodridge
(2002), Gujarati & Porter (2008)
Modern Econometrics
Combining of (classical)
03
econometrics and time series
forecasting.
Statistics shift from inference to
prediction (…..)
ARCH/GARCH, ARDL, VAR,
VECM
- Some multivariate time
series
- Dynamic econometric
model
- Not strongly theoretical
based
Thomas (1998), Enders (2014),
Verbeek ()
Time Series Forecasting
Time series forecasting is the use of
04
a model to predict future values based
on previously observed values
Smoothing, Seasonal, ARIMA,
Intervention
- Get the pattern, predict the
future
- Forecast (Y^t+n) more important
than parameter intepretation (β)
- Based on data pattern
Box, Jenkins, Reinsel (2008),
Makridakis et al (1997), Wei
(2006)
 Example: How large a portion of the
Econometrics income is consumed?

Economic Mathematic Statistical

Model Estimation
Theory Formula

C = c+bY C^ t = 20+0.6Y t
.. Consumption is
a positive function
of income, ..
C =consumption C t = c+bY t +e t
Y =income
c =basic
consumption
b =portion of the
data Marginal
income
obs C Y
comsumed
1 23 30
propensity
2 44 52 to consume
Where did “b” = 0.6
J.M, Keynes
come from? n 61 73
(1883-1946)
Model

Model is any representation of

an actual phenomenon

Model represents a
compromise between reality
and manageability.
(“reasonable” and
“realistics”) vs limitation
 Econometric Models of
ASEAN Link
(Cobb-Douglas) Ichimura &
Production function Ezaki (1985)
developed a
Ln(Q)t = a + b Ln(K)t + c Ln(L)t +et model
containing
Or more complex hundreds of
equations
Ln(Q)t = a+ bLn(K)t + cLn(L)t +dLn(Z)t
+et
(Classical) Econometric Modelling Step by step

Model Specification

Estimation
Econometric
Modelling
Evaluation of the Model

Intepretation & Prediction

 (1) Model Specification
Based on Theory
Variable (plus) empirical experienced,
future expected, strong
reasonable arbitrary

Linear vs non linear

Relation
Form Additive vs Multiplicative

Single vs multiequation

Model Problem complexity vs data

availibility

Sign Based on theoretical

Hipothetically framework and literature
The anatomy of classical econometric modeling review
(Gujarati & Porter, 2008)
 (1) Model Specification
TERMINOLOGY AND NOTATION
• In the literature the
terms dependent
variable and
explanatory
variable are
described variously.
A representative
list is:
(Gujarati & Porter, 2008)
 warning

When going to interpret:

Econometric modeling, not
only getting 'good' output
from running an application
software, but also MUST
BE MEANING
When going to predict:
- Does the model fit?
- Are the data / observations
sufficient to capture the
pattern?
warning
MISS-SPECIFICATION (1) Model Specification
Coefficientsa

Coef of Price
Unstandardized Standardized
Coeff icients Coeff icients
Model B Std. Error Beta t Sig. is positive.
1 (Constant) 345.174 14.426 23.928 .000
Price 6.406 .607 .928 10.551 .000
a. Dependent Variable: Quantity demanded

Coefficientsa

Unstandardized Standardized
Coeff icients Coeff icients
Model B Std. Error Beta t Sig. Coef of Price
1 (Constant) -821.465 198.838 -4.131 .001 is negative.
Price -8.829 2.619 -1.279 -3.371 .004
Income 2.420 .412 2.228 5.873 .000
a. Dependent Variable: Quantity demanded

Source of miss-specification:
 Wrong functional form
 Lack of control variable
 Missed proxy data
 The variable in the model don’t match the data
Single or Multiple equation? (1) Model Specification

Yt=βo+β1It+β2rt+β3Zt+εt

Multicollinearity, because theoretically:

I = f(r)
 Single or Multiple equation? (1) Model Specification

Multiple equation model:

(1) Yt=βo+β1It+β2Zt+ε1t
recursive

Straight foreward,
no simultaneity
(2) It=β3+β4rt+ε2t
or
simultaneous

(1) Yt=βo+β1It+β2Zt+ε1t
equation

Simultaneity
between Y and I
(2) It=β3+β4rt+β5Yt+ε2t
Single or Multiple equation? (1) Model Specification

The share of expenditure on food will fall as the share of spending on

recreation or other increases

 Y is share of expenditure for a

Y1t=βo1+β11X11t+β21X21t+..+βk1Xk1t+ε1t commodity
Y2t=βo2+β12X12t+β21X22t+..+βk2Xk2t+ε2t  X are explanatory variables
 “no endogenous variable as an
.. explanatory variable”

Ypt=βop+β1pX1pt+β2pX2pt+..+β2pXkpt+εpt
 They’re correlated ‘via’ error term,
because of unobservable effect.
 In the SUR model: correlated occurred
among equation, it’s mean that there
Seemingly Unrelated (SUR) Model are correlated among endogenous
‘seemingly unrelated’ among equations, but ‘related’ variables
 (2) Estimation
Gathering the Data Examination of aggregation
Contents Title
problems
 Time-series
 Cross-sectional
 Panel data
 Engineering data Examination of the degree of
 Legislation and other regulation
correlation among the
 Data constructed by econometrician:
i.e. dummy variable explanatory variables.

Identification Choice of the appropriate

 Is data available? econometric technique
 Can the equation be
solved?
warning Data are not just numbers that you get,
but must be meaningful in your research.
Pay attention to concepts, aggregation, measurement, …
Problem of aggregation Nama Sungai di
DKI Jakarta
Jumlah sungai yang melintas 1 Mookevart
menurut wilayah administrasi 2 Angke
di DKI Jakarta 3 Pesanggrahan
4 Grogol
Wilayah Administrasi Jumlah
5 Krukut
Jakarta Barat 6 6 Baru Barat
Jakarta Utara 8 How many rivers in 7 Ciliwung
8 Baru Timur
jakarta Pusat 6 DKI Jakarta?
9 Cipinang
Jakarta Timur 7 33 ? NO 10 Sunter
Jakarta Selatan 6 11 Buaran
12 Jatikramat
Stock vs Flow 13 Cakung
Gathering the Data
 Population cannot be aggregated between months
 Price cannot be aggregated across regions
Level vs Growth
 a decrease in the inflation rate is not necessarily a decrease in the price level
Econometric Model & Its Estimation Estimation
Methods

No lag endogenous variable OLS

Static as a explanatory variable
MM
Single Lag endogenous variable MLE
Dynamic as a explanatory variable
equation GMM
Recursive ILS
Estimation:
Individual 2SLS
Multiple Simultaneous 3SLS
equation equation GLS
Estimation:
Seemingly ..
System
Unrelated
(SUR) etc
Econometric Model & Its Estimation

Endogenous variable as an
Estimation Method
explanatory variable
when NO There is
Recursive Simultaneous individual estimation, each
NO ==>
Correlation model / OLS / ILS or 2SLS equation separately

of residual Simultaneous
between SUR Model / estimated by system,
There is with SUR / ==>
equations GLS simultaneously for a model
3SLS
 (3) Evaluation of Estimates
“Theoretically meaningfull, statistically satisfactory”
(Koutsoyianis, 1977)

Economic ‘A Priori’ Criteria

Statistical Criteria: First-order

test  significancy and other
statistical measures are satisfied

Econometric Criteria: Second

order test - assumption of an
econometric technique are satisfied
 (4) Intepretation & Prediction
Slope Intercept
y = a + b1x1 +b2x2  Y value with no x unit, on average
dy/dx1 = b1  Is x possibly null?
Coeficient b1 is the average change in y for one
unit change in x1, provided we hold x2 fixed
Prediction & Simulation
lny = a + b1.lnx1 + b2.lnx2
(1/y)(dy/dx1) = b1.(1/x1)(dx1/dx1)
=> b1 = (dy/y)/(dx/x) =>coef of elasticity
Coeficient b1 is the percentage change in y for one
percent change in x1, provided we hold x2 fixed

y = a + b1x+b2x2

The average change in y for one unit change in x1,

depend on the level of x
THANK YOU