ECN 402

Dear students, welcome to the course ECN 402!

I Please find a seat !

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ECN 402 Econometrics

Astrid Kunze and Øivind A. Nilsen

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Outline

The Nature of Econometrics and Economic Data

Why study econometrics?

Why study econometrics in ECN402?

Course ambition

Practical information about the course

ECN 402
The Nature of Econometrics and Economic Data

What is econometrics?

I Econometrics is the use of statistical methods to analyze economic data.

I Econometricians typically analyze nonexperimental data.
I This course teaches Modern econometrics which is very applied. We use many examples
and hands-on data teaching methods
I Typical goals of econometric analysis:
I Quantify relationships between economic variables (economics, business economics,
social sciences,..)
I Testing economic theories and hypotheses
I Assess the effects of governmental policies or business decisions
I commen applications include forecasting of macro-economic variables (interest rates,
GDP, inflation)
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The Nature of Econometrics and Economic Data

Steps in econometric analysis

1. Economic model (this step is often skipped)

2. Econometric model
I Economic models
I Maybe micro- or macromodels
I Often use optimizing behaviour, equilibrium modeling, â
I Establish relationships between economic variables
I Examples: demand equations, pricing equations, â
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The Nature of Econometrics and Economic Data

Step 1: Economic Theory: The production of the firm

To study the effects of innovations on firm’s performance – where firm performance is

measured, for example, by sales – we can start with an equation such as

sales = f (innov , firmage , size, RD)

where firmage is for how many years the firm has existed, size is the number of employees,
and innov is a measure of innovations, (the variable of most interest).
I Functional form of relationship not specified.
I Equation could have been postulated without economic modeling.
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The Nature of Econometrics and Economic Data

Step 2: From Economic Theory to the econometric model

In general:
y = β0 + β1 x + u

Terminology for regressions:

Left side (Y) Right side (X)

Dependent variable Independent variable(s)
Explained variable Explanatory variable(s)
Response variable Control variable(s)
Regressand Regressor(s)
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The Nature of Econometrics and Economic Data

Step 2: From Economic Theory to the econometric model:

We can specify an econometric model for the sales/innovation example as

sales = β0 + β1 firmage + β2 size + β3 RD + β4 innov + u

• The constants β0 , β1 , β2 , β3 and β4 (“the betas”) are the parameters of the model, and it
is these (especially β4 in this example) that we hope to estimate.
• Ideally we will be able to collect data on sales, firmage , size, RD and innov from a large
group of active firms, for example, in Norway.
• The last term in the equation is u. It called the error term or disturbance, and
unobserved.
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The Nature of Econometrics and Economic Data

From Economic Theory to the econometric model:

We can specify an econometric model for the sales/innovation example as

sales = β0 + β1 firmage + β2 size + β3 RD + β4 innov + u

I The functional form has to be specified.

I Variables may have to be approximated by other quantities.
I Most of econometrics deals with the specification of the error u.
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The Nature of Econometrics and Economic Data

Examples of the use of econometric estimates

I Size of economic parameters: demand elasticities or labour supply elasticities

I Predict outcomes: Macroeconomic forecasting of inflation, interest rates, GDP, etc
I Test hypotheses: Does education affect wages?
I Evaluate policy: Does the extension of the duration of paid parental leave have
positive effects on children, mother’s labor market outcomes,...?
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The Nature of Econometrics and Economic Data

Econometrics compared to economic theory?

I Economic theory: qualitative results

I Example: Demand curves slope downwards. When price goes up, demand falls
I Example: Competition reduces prices to consumers
I Econometrics: quantitative results
I Example: When the price of tobacco increases by 1%, demand is reduced by 0,5%
I Example: How much does entry of generic drugs reduce the prices of brand-name
medicines?
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The Nature of Econometrics and Economic Data

Econometrics compared to statistics?

I Statistics: "let the data speak"; "summarize the data faithfully" "correlations?".
I Econometrics: "what do we learn from economic theory and the data at hand?"
"Causality?"
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The Nature of Econometrics and Economic Data

Causality and the notion of ceteris paribus

Definition of the causal effect of x on y, innovation on sales, for example:

How does variable y change if x is changed, but all other relevant factors are held
constant?
I Ceteris paribus: “other relevant factors being equal”
I Most economic questions are ceteris paribus questions.
I It is important to define which causal effect one is interested in.
I It is useful to describe how an experiment would have to be designed to infer the
causal effect in question.
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The Nature of Econometrics and Economic Data

Causality versus Correlation

Ultimately our focus in this course is to estimate a causal effect of x on y
I How can we be sure that a change in x causes a change in y and that x is not just
associated/correlated/related with y ?
I Key for any policy advice!
I Down to the model we choose, the required assumptions of this model in order to
estimate a causal effect, and how believable these assumptions are
I A fundamentally difficult point to ensure

With that being said, plenty of important research also addresses questions of correlation:
I Intergenerational mobility
I Inequality
I Insights from macroeconomics
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Why study econometrics?

Why econometrics?

I Most economists engage in economic analysis that is in part "empirical"

I Should Norges Bank change the interest rate?
I How much will a carbon tax reduce the demand for fossil fuel?
I How much does advertising affect sales?
I Do more women on company boards affect firm performance?
I How do management practices affect productivity of firms?
I In general: How much will a change in x affect y?
I From studying economics to being able to practice as an economist
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Why study econometrics?

Why econometrics is useful

I Data is increasingly collected and made publicly available

I Evidence-based decision making
I Being able to analyse and interpret data is a scarce skill in the labour market
I Employers value the ability to analyse and present data
I NHH involved with Office of the Auditor General of Norway (Riksrevisjonen) to teach
Econometrics and Causal Methods
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Why study econometrics in ECN402?

Why ECN402?
I Solid introduction to broad range of econometric methods: cross-sectional models,
difference-in-differences estimators, instrumental variable estimators, panel data
models, time series models. Many types of datasets. See course outline and reading
list.
I Hands-on approach, both in lectures and labs.
I Focus on learning practical skills
I Focus on capacity to help you hands on when working with Stata
I Apply what we learn in the lectures about model choice, validity of assumptions, etc to
working with actual data
I Use an array of different teaching approaches: lectures, in class problems, Stata
sessions, videos
I All lectures will be filmed and made available online (streaming and video), lectures cover
the main material, we may use ZOOM lectures, hybrid set up
 ECN402 Econometrics Fall 2021

Lecturers Prof. Astrid Kunze (AK)

Prof. Øivind A. Nilsen (ØAN)

TAs: PhD students: Daniel Carvajal-Zuniga, Daniel Duque, Paula Navarro

Masters students: Erlend Ratikainen Lund, and Thomas Marøy

Textbook: Jeffrey M. Wooldridge: "Introduction to econometrics " (7th ed) (JW)

Joshua D. Angrist and Jorn-Steffen Pischke "Mastering 'Metrics " (AP)

Lectures: Tuesday 14.15-16.00, AUD A

Thursday 14.15-16.00, AUD A

LABs: Follow the usual lecture schedule, except for LAB0 Introduction to STATA which is offered Tuesday and
Thurday 16-18 in Aud AUD A+LAB2. All other LABs take place in Aud AUDA+LAB2. We offer two LAB
sessions in weeks 37, 39, 41 and 44 and in parallel to the Tuesday-LABs an online LAB on ZOOM.
You only attend one lab session in each LAB-week. There are no lectures during LAB-weeks after LAB0.
NOTE: 2 Sept. 2021 the labs are in AUDA + LAB1 !

Date Lecture no Lecturer Topic Textbook chapters

Part 1: Introduction, basic econometrics

24-Aug-21 1 AK & ØAN Introduction: econometrics what and why? JW 1

26-Aug-21 2 AK The simple regression model and introduction to Stata JW 2

31-Aug-21 3 AK The multiple regression model: estimation JW 3

31-Aug-21 LAB 0 TAs Introduction to STATA, practice
2-Sep-21 4 AK The multiple regression model: inference JW 4, 5
2-Sep-21 LAB 0 TAs Introduction to STATA, practice

7-Sep-21 5 AK Qualitative information & heteroskedasticity JW 7, 8

9-Sep-21 6 AK Prediction and model specification JW 6, 9

14-Sep-21 LAB 1 TAs Stata exercise 1 (Cross-sectional analysis) Deadline : 21.09.2021, 2pm
16-Sep-21 LAB 1 TAs Stata exercise 1 (Cross-sectional analysis) Deadline : 21.09.2021, 2pm

Part 2: More advanced topics

21-Sep-21 7 AK Pooled cross sections, basic panel data methods JW 13, 14
23-Sep-21 8 AK More advanced panel data methods JW 14, AP 5

28-Sep-21 LAB 2 TAs Stata exercise 2 (Panel data analysis) Deadline : 05.10.2021, 2pm
30-Sep-21 LAB 2 TAs Stata exercise 2 (Panel data analysis) Deadline : 05.10.2021, 2pm

5-Oct-21 9 ØAN Instrumental Variables and 2SLS

JW 15.1-15.3, 15.5-15.6, AP 3
7-Oct-21 10 ØAN Instrumental Variables and 2SLS, continued

12-Oct-21 LAB 3 TAs Stata exercise 3 (Instrumental Variables) Deadline : 19.10.2021, 2pm
14-Oct-21 LAB 3 TAs Stata exercise 3 (Instrumental Variables) Deadline : 19.10.2021, 2pm

19-Oct-21 11 ØAN Time series models and processes JW 10, 11.1-11.3

21-Oct-21 12 ØAN Trends and seasonality, Autocorrelation JW 11.3, 12.1-12.5

26-Oct-21 13 ØAN Highly persistent time series

28-Oct-21 14 ØAN Empirical work and research data access and ethics JW 11.3, 18.2-18.4, & Hill et al.

2-Nov-21 LAB 4 TAs Stata exercise 4 (Time series analysis) Deadline : 08.11.2021, 10am
4-Nov-21 No lecture

9-Nov-21 15 AK & ØAN Summary, questions

10.des.21 EXAM
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Course ambition

At the end of this course

I You will be able to:

I interpret the results of empirical analyses and to be able to choose between competing
regression models
I conduct quantitative analysis where several factors can affect an outcome variable
simultaneously
I use STATA for doing econometric analysis, produce do-files and log-files, import data from
excel, and produce tables and figures
I interpret and critically deal with empirical work in applied econometrics
I choose and apply an appropriate scientific method for analysing the research question
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Course ambition

At the end of this course

I You will:
I know the structure and requirements for a master thesis, and be able to develop a
research question
I understand what assumptions econometric models are based on
I understand the ethical issues in collection and interpretation of data
I have a good background for more advanced econometric courses
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Practical information about the course

Lectures and textbook

Lectures:
I Tuesdays. 14.15-16.00 Aud A
I Thursdays. 14.15-16.00 Aud A
Textbook:
I Wooldridge: Introductory Econometrics: A Modern Approach (new edition, also
e-book, 7e, 2020)
I Most sections in the textbook is mostly unchanged from edition to edition, so you may
use older editions.
I Note however, that the discussion of causality has been modified and worked into
several chapters in 7E.)
Make sure to check Canvas regularly for information and possible changes of location
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Practical information about the course

Stata LAB sessions

I Place of LABs:
I Introductory Lab (LAB0): Tuesday, 16-18, Aud A+LAB 2 and Thursday 16-18 Aud A+LAB2
I There is no assignment to submit for LAB0, it is only practice for using Stata
I Lab Assignment 1
I Lab Assignment 2
I Lab Assignment 3
I Lab Assignment 4
I LAB sessions 1-4 take place in Aud A and room LAB2, and on ZOOM on Tuesdays
I Come instead of lectures at the usual lecture times (except for LAB 0)
I Stata sessions: weeks 37, 39, 41 and 44
I You can only go to one Lab session per each session.
I Course assistants will organise the LABs: Daniel Carvajal-Zuniga, Daniel Duque, Paula
Navarro, Erlend Ratikainen Lund, and Thomas Marøy.
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Practical information about the course

Stata sessions

I 4 Assignments, one for each Lab, that you may hand in after the lab, no assignment
after the first Introductory Lab (LAB0)
I Solutions to 2 assignments must be submitted and approved for course approval
I You can work in a group of up to 3 students!
I If you have course approval from a previous semester in ECN402, you do not need to gain
this again
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Practical information about the course

Introductory Lab Session (LAB0)

I Teaches the basics of Stata

I Both on Tuesday and Thursday next week
I Again, only come to one!
I If you have used Stata previously and feel you are confident in your abilities to do the
assignment without any assistance, then you need not attend the introductory lab
I If you are in any doubt, come to the introductory lab!
I We have posted some links demonstrating basics about Stata on Canvas
I If you are unfamiliar with Stata, we strongly advise you to take a look at these resources
before the Introductory Lab
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Practical information about the course

Stata sessions
What is the purpose of the Lab Sessions?

I The assignments contain questions covering the material by empirical exercises, and
you start solving them during the LABs.
I Apply what we learn in the lectures to actual economic and business data
I Reinforces and develops what we learn in the lectures
I Examine how we choose between various models, methods, variables, etc. in a
hands on setting
I Gets you to think about similar choices and issues you would face doing an empirical
thesis
I Also teaches you how to present your results in clear tables, figures, etc.
I You get detailed feedback and comments from us on your answers
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Practical information about the course

Feedback we received previously from students: Q and A.

I Q: ”What worked best in the course?”

I A: - ”I found the LAB-sessions highly useful. A good way for us students to
understand the course content.”
I ”I learnt a lot through the labs”
I ”The lab session is useful in helping me clarify my doubts about certain areas.”

I Q: ”What could you as a student do differently to improve your learning”

I A: ”Attand all the lab assignment.”
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Practical information about the course

Stata sessions
I Read the assignments and download data beforehand
I Start working on the problems before the lab, and write down your questions.
I Bring your own computer
I Work in small groups and help each other
I We will go around and help you with any questions you may have
I Hand in assignments via Canvas: for deadlines, see course schedule
I Write in English.
I Group size for assignments : 3 students (not more!)
I Note on Canvas you can ask questions to fellow students: select in the menu bar
Discussions
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Practical information about the course

The Exam

I The final grade is based on a final written school exam of four (4) hours∗ . The exam
answer must be in English.
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Practical information about the course

Language for exams and assignments

I Assignments: English
I Exam will be given in English, and should be answered in English
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Practical information about the course

What do we expect of you

I 12 weeks of teaching
I Normal week: 2 class meetings
I Prepare relevant chapters in Wooldridge (read, videos,..), lecture 2 hours, after-work ×2
I We use many economic examples in the lectures.
I We show how to work with data in STATA.
I Stata session weeks:
I Prepare for lab session
I Lab session 2 hours
I Prepare before the lab and write assignment after lab
I Examine and understand solution proposal and individual feedback on assignment —
VERY IMPORTANT
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Practical information about the course

What we try to do

I Provide you with a well structured course with different types of learning activities
I Try to give instructions for preparations to classes via Canvas
I All lecture-notes, data and do files used in class, and video-links: Canvas
I ALL Lectures will be filmed
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Practical information about the course

What we try to do to assist students in learning under COVID19

I All material is online on Canvas, all lecture videos, labs partly on ZOOM
I We offer office hours during which we respond to questions either by email or in
online meetings.
I Look on Canvas for the announcement of office hours by the teaching assistants and
lecturers.
I Look for updates regarding discussion groups during the semester
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Practical information about the course

The ECN402 team:

Prof. Øivind Anti Nilsen, Prof. Astrid Kunze; Doctoral candidates: Daniel Carvajal-Zuniga,
Daniel Duque, Paula Navarro, Masterstudents: Erlend Ratikainen Lund, Thomas Marøy.

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Practical information about the course

Home Work for the Students

I We hope all of you enroll in this course! Enroll now!

I Buy a copy of the textbook by Wooldridge: Introduction to Econometrics
I Find a group of 3 students to work on the lab assignments
I We are going to ask you to register the group on Canvas
I Register attendance for the lectures in Aud A at least the day before! See link under
People on Canvas. We do this on first come, first serve basis.
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Practical information about the course

Next Lecture

I Thanks for today and see you on Thursday same place, same time in the next lecture!
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