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Introduction
to Econometrics
T h i r d E d i t i o n U p d a te
James H. Stock
Harvard University
Mark W. Watson
Princeton University
Copyright © 2015, 2011, 2007 Pearson Education, Inc.
Library of Congress Cataloging-in-Publication Data
Stock, James H.
Introduction to econometrics/James H. Stock, Harvard University, Mark W. Watson, Princeton University.—
Third edition update.
pages cm.—(The Pearson series in economics)
Includes bibliographical references and index.
ISBN 978-0-13-348687-2—ISBN 0-13-348687-7
1. Econometrics. I. Watson, Mark W. II. Title.
HB139.S765 2015
330.01’5195––dc23
2014018465
ISBN-10: 0-13-348687-7
www.pearsonhighered.com ISBN-13: 978-0-13-348687-2
Brief Contents
PART ONE Introduction and Review
Chapter 1 Economic Questions and Data 1
Chapter 2 Review of Probability 14
Chapter 3 Review of Statistics 65
Part Two Fundamentals of Regression Analysis

Chapter 4 Linear Regression with One Regressor 109
Chapter 5 Regression with a Single Regressor: Hypothesis Tests and Confidence
Intervals 146
Chapter 6 Linear Regression with Multiple Regressors 182
Chapter 7 Hypothesis Tests and Confidence Intervals in Multiple Regression 217
Chapter 8 Nonlinear Regression Functions 256
Chapter 9 Assessing Studies Based on Multiple Regression 315
Part Three Further Topics in Regression Analysis

Chapter 10 Regression with Panel Data 350
Chapter 11 Regression with a Binary Dependent Variable 385
Chapter 12 Instrumental Variables Regression 424
Chapter 13 Experiments and Quasi-Experiments 475
Part Four Regression Analysis of Economic Time Series Data

Chapter 14 Introduction to Time Series Regression and Forecasting 522
Chapter 15 Estimation of Dynamic Causal Effects 589
Chapter 16 Additional Topics in Time Series Regression 638
Part Five The Econometric Theory of Regression Analysis

Chapter 17 The Theory of Linear Regression with One Regressor 676
Chapter 18 The Theory of Multiple Regression 705
Contents
Preface xxix
Part One Introduction and Review

Chapter 1 Economic Questions and Data 1
1.1 Economic Questions We Examine 1
Question #1: Does Reducing Class Size Improve Elementary School Education? 2
Question #2: Is There Racial Discrimination in the Market for Home Loans? 3
Question #3: How Much Do Cigarette Taxes Reduce Smoking? 3
Question #4: By How Much Will U.S. GDP Grow Next Year? 4
Quantitative Questions, Quantitative Answers 5
1.2 Causal Effects and Idealized Experiments 5

Estimation of Causal Effects 6
Forecasting and Causality 7
1.3 Data: Sources and Types 7

Experimental Versus Observational Data 7
Cross-Sectional Data 8
Time Series Data 9
Panel Data 11
Chapter 2 Review of Probability 14

2.1 Random Variables and Probability Distributions 15
Probabilities, the Sample Space, and Random Variables 15
Probability Distribution of a Discrete Random Variable 16
Probability Distribution of a Continuous Random Variable 19
2.2 Expected Values, Mean, and Variance 19

The Expected Value of a Random Variable 19
The Standard Deviation and Variance 21
Mean and Variance of a Linear Function of a Random Variable 22
Other Measures of the Shape of a Distribution 23
2.3 Two Random Variables 26

Joint and Marginal Distributions 26
Conditional Distributions 27
Independence 31
Covariance and Correlation 31
The Mean and Variance of Sums of Random Variables 32
2.4 The Normal, Chi-Squared, Student t, and F Distributions 36

The Normal Distribution 36
The Chi-Squared Distribution 41
The Student t Distribution 41
The F Distribution 42
2.5 Random Sampling and the Distribution of the Sample Average 43

Random Sampling 43
The Sampling Distribution of the Sample Average 44
2.6 Large-Sample Approximations to Sampling Distributions 47

The Law of Large Numbers and Consistency 48
The Central Limit Theorem 50
Appendix 2.1 Derivation of Results in Key Concept 2.3 63
Chapter 3 Review of Statistics 65

3.1 Estimation of the Population Mean 66
Estimators and Their Properties 66
Properties of Y 68
The Importance of Random Sampling 70
3.2 Hypothesis Tests Concerning the Population Mean 71

Null and Alternative Hypotheses 71
The p-Value 72
Calculating the p-Value When sY Is Known 73
The Sample Variance, Sample Standard Deviation, and Standard Error 74
Calculating the p-Value When sY Is Unknown 76
The t-Statistic 76
Hypothesis Testing with a Prespecified Significance Level 77
One-Sided Alternatives 79
3.3 Confidence Intervals for the Population Mean 80

3.4 Comparing Means from Different Populations 82
Hypothesis Tests for the Difference Between Two Means 82
Confidence Intervals for the Difference Between Two Population Means 84
3.5 Differences-of-Means Estimation of Causal Effects Using
Experimental Data 84
The Causal Effect as a Difference of Conditional Expectations 85
Estimation of the Causal Effect Using Differences of Means 85
3.6 Using the t-Statistic When the Sample Size Is Small 87

The t-Statistic and the Student t Distribution 87
Use of the Student t Distribution in Practice 89
3.7 Scatterplots, the Sample Covariance, and the Sample

Correlation 91
Scatterplots 91
Sample Covariance and Correlation 92
Appendix 3.1 The U.S. Current Population Survey 106
Appendix 3.2 Two Proofs That Y Is the Least Squares Estimator of μY 107
Appendix 3.3 A Proof That the Sample Variance Is Consistent 108

Chapter 4 Linear Regression with One Regressor 109
4.1 The Linear Regression Model 109
4.2 Estimating the Coefficients of the Linear Regression
Model 114
The Ordinary Least Squares Estimator 116
OLS Estimates of the Relationship Between Test Scores and the Student–
Teacher Ratio 118
Why Use the OLS Estimator? 119
4.3 Measures of Fit 121

The R2 121
The Standard Error of the Regression 122
Application to the Test Score Data 123
4.4 The Least Squares Assumptions 124

Assumption #1: The Conditional Distribution of ui Given Xi Has a Mean of Zero 124
Assumption #2: (Xi, Yi), i = 1,…, n, Are Independently and Identically
Distributed 126
Assumption #3: Large Outliers Are Unlikely 127
Use of the Least Squares Assumptions 128
4.5 Sampling Distribution of the OLS Estimators 129
The Sampling Distribution of the OLS Estimators 130
4.6 Conclusion 133

Appendix 4.1 The California Test Score Data Set 141
Appendix 4.2 Derivation of the OLS Estimators 141
Appendix 4.3 Sampling Distribution of the OLS Estimator 142
Chapter 5 Regression with a Single Regressor: Hypothesis Tests and

Confidence Intervals 146
5.1 Testing Hypotheses About One of the Regression
Coefficients 146
Two-Sided Hypotheses Concerning β1 147
One-Sided Hypotheses Concerning β1 150
Testing Hypotheses About the Intercept β0 152
5.2 Confidence Intervals for a Regression Coefficient 153

5.3 Regression When X Is a Binary Variable 155
Interpretation of the Regression Coefficients 155
5.4 Heteroskedasticity and Homoskedasticity 157

What Are Heteroskedasticity and Homoskedasticity? 158
Mathematical Implications of Homoskedasticity 160
What Does This Mean in Practice? 161
5.5 The Theoretical Foundations of Ordinary Least Squares 163

Linear Conditionally Unbiased Estimators and the Gauss–Markov
Theorem 164
Regression Estimators Other Than OLS 165
5.6 Using the t-Statistic in Regression When the Sample Size

Is Small 166
The t-Statistic and the Student t Distribution 166
Use of the Student t Distribution in Practice 167
5.7 Conclusion 168

Appendix 5.1 Formulas for OLS Standard Errors 177
Appendix 5.2 The Gauss–Markov Conditions and a Proof of the
Gauss–Markov Theorem 178
Chapter 6 Linear Regression with Multiple Regressors 182
6.1 Omitted Variable Bias 182
Definition of Omitted Variable Bias 183
A Formula for Omitted Variable Bias 185
Addressing Omitted Variable Bias by Dividing the Data into
Groups 187
6.2 The Multiple Regression Model 189

The Population Regression Line 189
The Population Multiple Regression Model 190
6.3 The OLS Estimator in Multiple Regression 192

The OLS Estimator 193
Application to Test Scores and the Student–Teacher Ratio 194
6.4 Measures of Fit in Multiple Regression 196

The Standard Error of the Regression (SER) 196
The R2 196
The “Adjusted R2” 197
Application to Test Scores 198
6.5 The Least Squares Assumptions in Multiple

Regression 199
Assumption #1: The Conditional Distribution of ui Given X1i, X2i, c, Xki Has a
Mean of Zero 199
Assumption #2: (X1i, X2i, c, Xki, Yi), i = 1, c, n, Are i.i.d. 199
Assumption #3: Large Outliers Are Unlikely 199
Assumption #4: No Perfect Multicollinearity 200
6.6 The Distribution of the OLS Estimators in Multiple

Regression 201
6.7 Multicollinearity 202
Examples of Perfect Multicollinearity 203
Imperfect Multicollinearity 205
6.8 Conclusion 206

Appendix 6.1 Derivation of Equation (6.1) 214
Appendix 6.2 Distribution of the OLS Estimators When There Are Two
Regressors and Homoskedastic Errors 214
Appendix 6.3 The Frisch–Waugh Theorem 215
Chapter 7 Hypothesis Tests and Confidence Intervals in Multiple
Regression 217
7.1 Hypothesis Tests and Confidence Intervals for a Single Coefficient 217
Standard Errors for the OLS Estimators 217
Hypothesis Tests for a Single Coefficient 218
Confidence Intervals for a Single Coefficient 219
7.2 Tests of Joint Hypotheses 222

Testing Hypotheses on Two or More Coefficients 222
The F-Statistic 224
The Homoskedasticity-Only F-Statistic 227
7.3 Testing Single Restrictions Involving Multiple Coefficients 229

7.4 Confidence Sets for Multiple Coefficients 231
7.5 Model Specification for Multiple Regression 232
Omitted Variable Bias in Multiple Regression 233
The Role of Control Variables in Multiple Regression 234
Model Specification in Theory and in Practice 236
Interpreting the R2 and the Adjusted R2 in Practice 237
7.6 Analysis of the Test Score Data Set 238

7.7 Conclusion 243
Appendix 7.1 The Bonferroni Test of a Joint Hypothesis 251
Appendix 7.2 Conditional Mean Independence 253
Chapter 8 Nonlinear Regression Functions 256

8.1 A General Strategy for Modeling Nonlinear Regression Functions 258
Test Scores and District Income 258
The Effect on Y of a Change in X in Nonlinear Specifications 261
A General Approach to Modeling Nonlinearities Using Multiple Regression 266
8.2 Nonlinear Functions of a Single Independent Variable 266

Polynomials 267
Logarithms 269
Polynomial and Logarithmic Models of Test Scores and District Income 277
8.3 Interactions Between Independent Variables 278
Interactions Between Two Binary Variables 279
Interactions Between a Continuous and a Binary Variable 282
Interactions Between Two Continuous Variables 286
8.4 Nonlinear Effects on Test Scores of the Student–Teacher Ratio 293

Discussion of Regression Results 293
Summary of Findings 297
8.5 Conclusion 298

Appendix 8.1 Regression Functions That Are Nonlinear in the
Parameters 309
Appendix 8.2 Slopes and Elasticities for Nonlinear Regression
Functions 313
Chapter 9 Assessing Studies Based on Multiple Regression 315

9.1 Internal and External Validity 315
Threats to Internal Validity 316
Threats to External Validity 317
9.2 Threats to Internal Validity of Multiple Regression Analysis 319

Omitted Variable Bias 319
Misspecification of the Functional Form of the Regression Function 321
Measurement Error and Errors-in-Variables Bias 322
Missing Data and Sample Selection 325
Simultaneous Causality 326
Sources of Inconsistency of OLS Standard Errors 329
9.3 Internal and External Validity When the Regression Is Used for
Forecasting 331
Using Regression Models for Forecasting 331
Assessing the Validity of Regression Models for Forecasting 332
9.4 Example: Test Scores and Class Size 332

External Validity 332
Internal Validity 339
Discussion and Implications 341
9.5 Conclusion 342

Appendix 9.1 The Massachusetts Elementary School Testing Data 349
Chapter 10 Regression with Panel Data 350
10.1 Panel Data 351
Example: Traffic Deaths and Alcohol Taxes 352
10.2 Panel Data with Two Time Periods: “Before and After”
Comparisons 354
10.3 Fixed Effects Regression 357
The Fixed Effects Regression Model 357
Estimation and Inference 359
Application to Traffic Deaths 361
10.4 Regression with Time Fixed Effects 361

Time Effects Only 362
Both Entity and Time Fixed Effects 363
10.5 The Fixed Effects Regression Assumptions and Standard Errors for
Fixed Effects Regression 365
The Fixed Effects Regression Assumptions 365
Standard Errors for Fixed Effects Regression 367
10.6 Drunk Driving Laws and Traffic Deaths 368

10.7 Conclusion 372
Appendix 10.1 The State Traffic Fatality Data Set 380
Appendix 10.2 Standard Errors for Fixed Effects Regression 380
Chapter 11 Regression with a Binary Dependent Variable 385

11.1 Binary Dependent Variables and the Linear Probability Model 386
Binary Dependent Variables 386
The Linear Probability Model 388
11.2 Probit and Logit Regression 391

Probit Regression 391
Logit Regression 396
Comparing the Linear Probability, Probit, and Logit Models 398
11.3 Estimation and Inference in the Logit and Probit Models 398
Nonlinear Least Squares Estimation 399
Maximum Likelihood Estimation 400
Measures of Fit 401
11.4 Application to the Boston HMDA Data 402

11.5 Conclusion 409
Appendix 11.1 The Boston HMDA Data Set 418
Appendix 11.2 Maximum Likelihood Estimation 418
Appendix 11.3 Other Limited Dependent Variable Models 421
Chapter 12 Instrumental Variables Regression 424

12.1 The IV Estimator with a Single Regressor and a Single
Instrument 425
The IV Model and Assumptions 425
The Two Stage Least Squares Estimator 426
Why Does IV Regression Work? 427
The Sampling Distribution of the TSLS Estimator 431
Application to the Demand for Cigarettes 433
12.2 The General IV Regression Model 435

TSLS in the General IV Model 437
Instrument Relevance and Exogeneity in the General IV Model 438
The IV Regression Assumptions and Sampling Distribution of the
TSLS Estimator 439
Inference Using the TSLS Estimator 440
Application to the Demand for Cigarettes 441
12.3 Checking Instrument Validity 442

Assumption #1: Instrument Relevance 443
Assumption #2: Instrument Exogeneity 445
12.4 Application to the Demand for Cigarettes 448

12.5 Where Do Valid Instruments Come From? 453
Three Examples 454
12.6 Conclusion 458

Appendix 12.1 The Cigarette Consumption Panel Data Set 467
Appendix 12.2 Derivation of the Formula for the TSLS Estimator in
Equation (12.4) 467
Appendix 12.3 Large-Sample Distribution of the TSLS Estimator 468
Appendix 12.4 Large-Sample Distribution of the TSLS Estimator When
the Instrument Is Not Valid 469
Appendix 12.5 Instrumental Variables Analysis with Weak
Instruments 471
Appendix 12.6 TSLS with Control Variables 473
Chapter 13 Experiments and Quasi-Experiments 475

13.1 Potential Outcomes, Causal Effects, and Idealized
Experiments 476
Potential Outcomes and the Average Causal Effect 476
Econometric Methods for Analyzing Experimental Data 478
13.2 Threats to Validity of Experiments 479

13.3 Experimental Estimates of the Effect of Class Size

Reductions 484
Experimental Design 485
Analysis of the STAR Data 486
Comparison of the Observational and Experimental Estimates of Class Size
Effects 491
13.4 Quasi-Experiments 493

Examples 494
The Differences-in-Differences Estimator 496
Instrumental Variables Estimators 499
Regression Discontinuity Estimators 500
13.5 Potential Problems with Quasi-Experiments 502

13.6 Experimental and Quasi-Experimental Estimates in Heterogeneous

Populations 504
OLS with Heterogeneous Causal Effects 505
IV Regression with Heterogeneous Causal Effects 506
13.7 Conclusion 509
Appendix 13.1 The Project STAR Data Set 518
Appendix 13.2 IV Estimation When the Causal Effect Varies Across
Individuals 518
Appendix 13.3 The Potential Outcomes Framework for Analyzing Data
from Experiments 520
Part Four Regression Analysis of Economic Time Series Data

Chapter 14 Introduction to Time Series Regression and Forecasting 522
14.1 Using Regression Models for Forecasting 523
14.2 Introduction to Time Series Data and Serial Correlation 524
Real GDP in the United States 524
Lags, First Differences, Logarithms, and Growth Rates 525
Autocorrelation 528
Other Examples of Economic Time Series 529
14.3 Autoregressions 531

The First-Order Autoregressive Model 531
The pth-Order Autoregressive Model 534
14.4 Time Series Regression with Additional Predictors and the

Autoregressive Distributed Lag Model 537
Forecasting GDP Growth Using the Term Spread 537
Stationarity 540
Time Series Regression with Multiple Predictors 541
Forecast Uncertainty and Forecast Intervals 544
14.5 Lag Length Selection Using Information Criteria 547

Determining the Order of an Autoregression 547
Lag Length Selection in Time Series Regression with Multiple Predictors 550
14.6 Nonstationarity I: Trends 551

What Is a Trend? 551
Problems Caused by Stochastic Trends 554
Detecting Stochastic Trends: Testing for a Unit AR Root 556
Avoiding the Problems Caused by Stochastic Trends 561
14.7 Nonstationarity II: Breaks 561
What Is a Break? 562
Testing for Breaks 562
Pseudo Out-of-Sample Forecasting 567
Avoiding the Problems Caused by Breaks 573
14.8 Conclusion 573

Appendix 14.1 Time Series Data Used in Chapter 14 583
Appendix 14.2 Stationarity in the AR(1) Model 584
Appendix 14.3 Lag Operator Notation 585
Appendix 14.4 ARMA Models 586
Appendix 14.5 Consistency of the BIC Lag Length Estimator 587
Chapter 15 Estimation of Dynamic Causal Effects 589

15.1 An Initial Taste of the Orange Juice Data 590
15.2 Dynamic Causal Effects 593
Causal Effects and Time Series Data 593
Two Types of Exogeneity 596
15.3 Estimation of Dynamic Causal Effects with Exogenous

Regressors 597
The Distributed Lag Model Assumptions 598
Autocorrelated ut, Standard Errors, and Inference 599
Dynamic Multipliers and Cumulative Dynamic Multipliers 600
15.4 Heteroskedasticity- and Autocorrelation-Consistent Standard

Errors 601
Distribution of the OLS Estimator with Autocorrelated Errors 602
HAC Standard Errors 604
15.5 Estimation of Dynamic Causal Effects with Strictly Exogenous

Regressors 606
The Distributed Lag Model with AR(1) Errors 607
OLS Estimation of the ADL Model 610
GLS Estimation 611
The Distributed Lag Model with Additional Lags and AR(p) Errors 613
15.6 Orange Juice Prices and Cold Weather 616

15.7 Is Exogeneity Plausible? Some Examples 624
U.S. Income and Australian Exports 624
Oil Prices and Inflation 625
Monetary Policy and Inflation 626
The Growth Rate of GDP and the Term Spread 626
15.8 Conclusion 627

Appendix 15.1 The Orange Juice Data Set 634
Appendix 15.2 The ADL Model and Generalized Least Squares in Lag
Operator Notation 634
Chapter 16 Additional Topics in Time Series Regression 638

16.1 Vector Autoregressions 638
The VAR Model 639
A VAR Model of the Growth Rate of GDP and the Term Spread 642
16.2 Multiperiod Forecasts 643

Iterated Multiperiod Forecasts 643
Direct Multiperiod Forecasts 645
Which Method Should You Use? 648
16.3 Orders of Integration and the DF-GLS Unit Root Test 649
Other Models of Trends and Orders of Integration 649
The DF-GLS Test for a Unit Root 651
Why Do Unit Root Tests Have Nonnormal Distributions? 654
16.4 Cointegration 656

Cointegration and Error Correction 656
How Can You Tell Whether Two Variables Are Cointegrated? 658
Estimation of Cointegrating Coefficients 659
Extension to Multiple Cointegrated Variables 661
Application to Interest Rates 662
16.5 Volatility Clustering and Autoregressive Conditional

Heteroskedasticity 664
Volatility Clustering 664
Autoregressive Conditional Heteroskedasticity 666
Application to Stock Price Volatility 667
16.6 Conclusion 670

Part Five The Econometric Theory of Regression Analysis
Chapter 17 The Theory of Linear Regression with One Regressor 676
17.1 The Extended Least Squares Assumptions and the OLS Estimator 677
The Extended Least Squares Assumptions 677
17.2 Fundamentals of Asymptotic Distribution Theory 679

Convergence in Probability and the Law of Large Numbers 680
The Central Limit Theorem and Convergence in Distribution 682
Slutsky’s Theorem and the Continuous Mapping Theorem 683
Application to the t-Statistic Based on the Sample Mean 684
17.3 Asymptotic Distribution of the OLS Estimator and

t-Statistic 685
Consistency and Asymptotic Normality of the OLS Estimators 685
Consistency of Heteroskedasticity-Robust Standard Errors 685
Asymptotic Normality of the Heteroskedasticity-Robust t-Statistic 687
17.4 Exact Sampling Distributions When the Errors Are Normally

Distributed 687
Distribution of βn1 with Normal Errors 687
Distribution of the Homoskedasticity-Only t-Statistic 689
17.5 Weighted Least Squares 690

WLS with Known Heteroskedasticity 690
WLS with Heteroskedasticity of Known Functional Form 691
Heteroskedasticity-Robust Standard Errors or WLS? 694
Appendix 17.1 The Normal and Related Distributions and Moments of
Continuous Random Variables 700
Appendix 17.2 Two Inequalities 703
Chapter 18 The Theory of Multiple Regression 705

18.1 The Linear Multiple Regression Model and OLS Estimator in Matrix
Form 706
The Multiple Regression Model in Matrix Notation 706
The Extended Least Squares Assumptions 708
18.2 Asymptotic Distribution of the OLS Estimator and t-Statistic 710
The Multivariate Central Limit Theorem 710
Asymptotic Normality of bn 711
Heteroskedasticity-Robust Standard Errors 712
Confidence Intervals for Predicted Effects 713
Asymptotic Distribution of the t-Statistic 713
18.3 Tests of Joint Hypotheses 713

Joint Hypotheses in Matrix Notation 714
Asymptotic Distribution of the F-Statistic 714
Confidence Sets for Multiple Coefficients 715
18.4 Distribution of Regression Statistics with Normal Errors 716

Matrix Representations of OLS Regression Statistics 716
Distribution of bn with Normal Errors 717
Distribution of s2uN 718
Homoskedasticity-Only Standard Errors 718
Distribution of the t-Statistic 719
Distribution of the F-Statistic 719
18.5 Efficiency of the OLS Estimator with Homoskedastic Errors 720

The Gauss–Markov Conditions for Multiple Regression 720
Linear Conditionally Unbiased Estimators 720
The Gauss–Markov Theorem for Multiple Regression 721
18.6 Generalized Least Squares 722

The GLS Assumptions 723
GLS When Ω Is Known 725
GLS When Ω Contains Unknown Parameters 726
The Zero Conditional Mean Assumption and GLS 726
18.7 Instrumental Variables and Generalized Method of Moments

Estimation 728
The IV Estimator in Matrix Form 729
Asymptotic Distribution of the TSLS Estimator 730
Properties of TSLS When the Errors Are Homoskedastic 731
Generalized Method of Moments Estimation in Linear Models 734
Appendix 18.1 Summary of Matrix Algebra 746
Appendix 18.2 Multivariate Distributions 749
Appendix 18.3 Derivation of the Asymptotic Distribution of βn 751
Appendix 18.4 Derivations of Exact Distributions of OLS Test Statistics
with Normal Errors 752
Appendix 18.5 Proof of the Gauss–Markov Theorem for Multiple
Regression 753
Appendix 18.6 Proof of Selected Results for IV and GMM Estimation 754
Appendix 757
References 765
Glossary 771
Index 779
Key Concepts
Part One Introduction and Review

1.1 Cross-Sectional, Time Series, and Panel Data 12
2.1 Expected Value and the Mean 20
2.2 Variance and Standard Deviation 21
2.3 Means, Variances, and Covariances of Sums of Random Variables 35
2.4 Computing Probabilities Involving Normal Random Variables 37
2.5 Simple Random Sampling and i.i.d. Random Variables 44
2.6 Convergence in Probability, Consistency, and the Law of Large Numbers 48
2.7 The Central Limit Theorem 52
3.1 Estimators and Estimates 67
3.2 Bias, Consistency, and Efficiency 68
3.3 Efficiency of Y : Y Is BLUE 69
3.4 The Standard Error of Y 75
3.5 The Terminology of Hypothesis Testing 78
3.6 Testing the Hypothesis E(Y) = μY,0 Against the Alternative E(Y) ≠ μY,0 79
3.7 Confidence Intervals for the Population Mean 81

4.1 Terminology for the Linear Regression Model with a Single Regressor 113
4.2 The OLS Estimator, Predicted Values, and Residuals 117
4.3 The Least Squares Assumptions 129
4.4 Large-Sample Distributions of bn0 and bn1 131
5.1 General Form of the t-Statistic 147
5.2 Testing the Hypothesis b1 = b1,0 Against the Alternative b1 ≠ b1,0 149
5.3 Confidence Interval for β1 154
5.4 Heteroskedasticity and Homoskedasticity 159
5.5 The Gauss–Markov Theorem for bn1 165
6.1 Omitted Variable Bias in Regression with a Single Regressor 185
6.2 The Multiple Regression Model 192
6.3 The OLS Estimators, Predicted Values, and Residuals in the Multiple Regression
Model 194
6.4 The Least Squares Assumptions in the Multiple Regression Model 201
6.5 Large-Sample Distribution of bn0, bn1, c, bnk 202
7.1 Testing the Hypothesis bj = bj,0 Against the Alternative bj ≠ bj,0 219
7.2 Confidence Intervals for a Single Coefficient in Multiple Regression 220
7.3 Omitted Variable Bias in Multiple Regression 233
7.4 R2 and R 2: What They Tell You—and What They Don’t 238
8.1 The Expected Change on Y of a Change in X1 in the Nonlinear Regression
Model (8.3) 263
8.2 Logarithms in Regression: Three Cases 276
8.3 A Method for Interpreting Coefficients in Regressions with Binary
Variables 281
8.4 Interactions Between Binary and Continuous Variables 284
8.5 Interactions in Multiple Regression 289
9.1 Internal and External Validity 316
9.2 Omitted Variable Bias: Should I Include More Variables in
My Regression? 321
9.3 Functional Form Misspecification 322
9.4 Errors-in-Variables Bias 324
9.5 Sample Selection Bias 326
9.6 Simultaneous Causality Bias 329
9.7 Threats to the Internal Validity of a Multiple Regression Study 330

10.1 Notation for Panel Data 351
10.2 The Fixed Effects Regression Model 359
10.3 The Fixed Effects Regression Assumptions 366
11.1 The Linear Probability Model 389
11.2 The Probit Model, Predicted Probabilities, and Estimated Effects 394
11.3 Logit Regression 396
12.1 The General Instrumental Variables Regression Model and
Terminology 436
12.2 Two Stage Least Squares 438
12.3 The Two Conditions for Valid Instruments 439
12.4 The IV Regression Assumptions 440
12.5 A Rule of Thumb for Checking for Weak Instruments 444
12.6 The Overidentifying Restrictions Test (The J-Statistic) 448
Part four Regression Analysis of Economic Time Series Data

14.1 Lags, First Differences, Logarithms, and Growth Rates 527
14.2 Autocorrelation (Serial Correlation) and Autocovariance 528
14.3 Autoregressions 535
14.4 The Autoregressive Distributed Lag Model 540
14.5 Stationarity 541
14.6 Time Series Regression with Multiple Predictors 542
14.7 Granger Causality Tests (Tests of Predictive Content) 543
14.8 The Augmented Dickey–Fuller Test for a Unit Autoregressive Root 559
14.9 The QLR Test for Coefficient Stability 566
14.10 Pseudo Out-of-Sample Forecasts 568
15.1 The Distributed Lag Model and Exogeneity 598
15.2 The Distributed Lag Model Assumptions 599
15.3 HAC Standard Errors 607
15.4 Estimation of Dynamic Multipliers Under Strict Exogeneity 616
16.1 Vector Autoregressions 639
16.2 Iterated Multiperiod Forecasts 646
16.3 Direct Multiperiod Forecasts 648
16.4 Orders of Integration, Differencing, and Stationarity 650
16.5 Cointegration 657
Part five Regression Analysis of Economic Time Series Data

17.1 The Extended Least Squares Assumptions for Regression with a
Single Regressor 678
18.1 The Extended Least Squares Assumptions in the Multiple Regression
Model 707
18.2 The Multivariate Central Limit Theorem 711
18.3 Gauss–Markov Theorem for Multiple Regression 722
18.4 The GLS Assumptions 724
General Interest Boxes
The Distribution of Earnings in the United States in 2012 33
A Bad Day on Wall Street 39
Financial Diversification and Portfolios 46
Landon Wins! 70
The Gender Gap of Earnings of College Graduates in the United States 86
A Novel Way to Boost Retirement Savings 90
The “Beta” of a Stock 120
The Economic Value of a Year of Education: Homoskedasticity or
Heteroskedasticity? 162
The Mozart Effect: Omitted Variable Bias? 186
The Return to Education and the Gender Gap 287
The Demand for Economics Journals 290
Do Stock Mutual Funds Outperform the Market? 327
James Heckman and Daniel McFadden, Nobel Laureates 410
Who Invented Instrumental Variables Regression? 428
A Scary Regression 446
The Externalities of Smoking 450
The Hawthorne Effect 482
What Is the Effect on Employment of the Minimum Wage? 497
Can You Beat the Market? Part I 536
The River of Blood 546
Can You Beat the Market? Part II 570
Orange Trees on the March 623
NEWS FLASH: Commodity Traders Send Shivers Through Disney World 625
Nobel Laureates in Time Series Econometrics 669
Preface
E conometrics can be a fun course for both teacher and student. The real world
of economics, business, and government is a complicated and messy place,
full of competing ideas and questions that demand answers. Is it more effective
to tackle drunk driving by passing tough laws or by increasing the tax on alcohol?
Can you make money in the stock market by buying when prices are historically
low, relative to earnings, or should you just sit tight, as the random walk theory
of stock prices suggests? Can we improve elementary education by reducing class
sizes, or should we simply have our children listen to Mozart for 10 minutes a day?
Econometrics helps us sort out sound ideas from crazy ones and find quantitative
answers to important quantitative questions. Econometrics opens a window on
our complicated world that lets us see the relationships on which people, busi-
nesses, and governments base their decisions.
Introduction to Econometrics is designed for a first course in undergradu-
ate econometrics. It is our experience that to make econometrics relevant in
an introductory course, interesting applications must motivate the theory and
the theory must match the applications. This simple principle represents a sig-
nificant departure from the older generation of econometrics books, in which
theoretical models and assumptions do not match the applications. It is no won-
der that some students question the relevance of econometrics after they spend
much of their time learning assumptions that they subsequently realize are unre-
alistic so that they must then learn “solutions” to “problems” that arise when
the applications do not match the assumptions. We believe that it is far better
to motivate the need for tools with a concrete application and then to provide a
few simple assumptions that match the application. Because the theory is imme-
diately relevant to the applications, this approach can make econometrics come
alive.
New to the Third Edition
• Updated treatment of standard errors for panel data regression
• Discussion of when and why missing data can present a problem for regression
analysis
• The use of regression discontinuity design as a method for analyzing quasi-

experiments
• Updated discussion of weak instruments
• Discussion of the use and interpretation of control variables integrated into

the core development of regression analysis
• Introduction of the “potential outcomes” framework for experimental data
• Additional general interest boxes
• Additional exercises, both pencil-and-paper and empirical
This third edition builds on the philosophy of the first and second editions
that applications should drive the theory, not the other way around.
One substantial change in this edition concerns inference in regression with
panel data (Chapter 10). In panel data, the data within an entity typically are
correlated over time. For inference to be valid, standard errors must be com-
puted using a method that is robust to this correlation. The chapter on panel data
now uses one such method, clustered standard errors, from the outset. Clustered
standard errors are the natural extension to panel data of the heteroskedasticity-
robust standard errors introduced in the initial treatment of regression analysis in
Part II. Recent research has shown that clustered standard errors have a number
of desirable properties, which are now discussed in Chapter 10 and in a revised
appendix to Chapter 10.
Another substantial set of changes concerns the treatment of experiments
and quasi-experiments in Chapter 13. The discussion of differences-in-differences
regression has been streamlined and draws directly on the multiple regression
principles introduced in Part II. Chapter 13 now discusses regression discontinuity
design, which is an intuitive and important framework for the analysis of quasi-
experimental data. In addition, Chapter 13 now introduces the potential outcomes
framework and relates this increasingly commonplace terminology to concepts
that were introduced in Parts I and II.
This edition has a number of other significant changes. One is that it incor-
porates a precise but accessible treatment of control variables into the initial
discussion of multiple regression. Chapter 7 now discusses conditions for con-
trol variables being successful in the sense that the coefficient on the variable
of interest is unbiased even though the coefficients on the control variables
generally are not. Other changes include a new discussion of missing data
in Chapter 9, a new optional calculus-based appendix to Chapter 8 on slopes
and elasticities of nonlinear regression functions, and an updated discussion
in Chapter 12 of what to do if you have weak instruments. This edition also
includes new general interest boxes, updated empirical examples, and additional
exercises.
The Updated Third Edition
• The time series data used in Chapters 14–16 have been extended through the
beginning of 2013 and now include the Great Recession.
• The empirical analysis in Chapter 14 now focuses on forecasting the growth

rate of real GDP using the term spread, replacing the Phillips curve forecasts
from earlier editions.
• Several new empirical exercises have been added to each chapter. Rather
than include all of the empirical exercises in the text, we have moved many of
them to the Companion Website, www.pearsonhighered.com/stock_watson.
This has two main advantages: first, we can offer more and more in-depth
exercises, and second, we can add and update exercises between editions. We
encourage you to browse the empirical exercises available on the Companion
Website.
Features of This Book

Introduction to Econometrics differs from other textbooks in three main ways.
First, we integrate real-world questions and data into the development of the
theory, and we take seriously the substantive findings of the resulting empirical
analysis. Second, our choice of topics reflects modern theory and practice. Third,
we provide theory and assumptions that match the applications. Our aim is to
teach students to become sophisticated consumers of econometrics and to do so
at a level of mathematics appropriate for an introductory course.
Real-World Questions and Data

We organize each methodological topic around an important real-world question
that demands a specific numerical answer. For example, we teach single-variable
regression, multiple regression, and functional form analysis in the context of
estimating the effect of school inputs on school outputs. (Do smaller elementary
school class sizes produce higher test scores?) We teach panel data methods in the
context of analyzing the effect of drunk driving laws on traffic fatalities. We use
possible racial discrimination in the market for home loans as the empirical appli-
cation for teaching regression with a binary dependent variable (logit and probit).
We teach instrumental variable estimation in the context of estimating the demand
elasticity for cigarettes. Although these examples involve economic reasoning, all
can be understood with only a single introductory course in economics, and many
can be understood without any previous economics coursework. Thus the instruc-
tor can focus on teaching econometrics, not microeconomics or macroeconomics.
We treat all our empirical applications seriously and in a way that shows
students how they can learn from data but at the same time be self-critical and
aware of the limitations of empirical analyses. Through each application, we teach
students to explore alternative specifications and thereby to assess whether their
substantive findings are robust. The questions asked in the empirical applica-
tions are important, and we provide serious and, we think, credible answers. We
encourage students and instructors to disagree, however, and invite them to rean-
alyze the data, which are provided on the textbook’s Companion Website (www
.pearsonhighered.com/stock_watson).
Contemporary Choice of Topics

Econometrics has come a long way since the 1980s. The topics we cover reflect
the best of contemporary applied econometrics. One can only do so much in an
introductory course, so we focus on procedures and tests that are commonly used
in practice. For example:
• Instrumental variables regression. We present instrumental variables regres-

sion as a general method for handling correlation between the error term and
a regressor, which can arise for many reasons, including omitted variables
and simultaneous causality. The two assumptions for a valid instrument—
exogeneity and relevance—are given equal billing. We follow that presenta-
tion with an extended discussion of where instruments come from and with
tests of overidentifying restrictions and diagnostics for weak instruments,
and we explain what to do if these diagnostics suggest problems.
• Program evaluation. An increasing number of econometric studies analyze

either randomized controlled experiments or quasi-experiments, also known
as natural experiments. We address these topics, often collectively referred
to as program evaluation, in Chapter 13. We present this research strategy as
an alternative approach to the problems of omitted variables, simultaneous
causality, and selection, and we assess both the strengths and the weaknesses
of studies using experimental or quasi-experimental data.
• Forecasting. The chapter on forecasting (Chapter 14) considers univariate

(autoregressive) and multivariate forecasts using time series regression, not
large simultaneous equation structural models. We focus on simple and reli-
able tools, such as autoregressions and model selection via an information
criterion, that work well in practice. This chapter also features a practically
oriented treatment of stochastic trends (unit roots), unit root tests, tests for
structural breaks (at known and unknown dates), and pseudo out-of-sample
forecasting, all in the context of developing stable and reliable time series
forecasting models.
• Time series regression. We make a clear distinction between two very dif-
ferent applications of time series regression: forecasting and estimation of
dynamic causal effects. The chapter on causal inference using time series
data (Chapter 15) pays careful attention to when different estimation meth-
ods, including generalized least squares, will or will not lead to valid causal
inferences and when it is advisable to estimate dynamic regressions using
OLS with heteroskedasticity- and autocorrelation-consistent standard errors.
Theory That Matches Applications

Although econometric tools are best motivated by empirical applications, stu-
dents need to learn enough econometric theory to understand the strengths and
limitations of those tools. We provide a modern treatment in which the fit between
theory and applications is as tight as possible, while keeping the mathematics at a
level that requires only algebra.
Modern empirical applications share some common characteristics: The data
sets typically are large (hundreds of observations, often more); regressors are
not fixed over repeated samples but rather are collected by random sampling (or
some other mechanism that makes them random); the data are not normally dis-
tributed; and there is no a priori reason to think that the errors are homoskedastic
(although often there are reasons to think that they are heteroskedastic).
These observations lead to important differences between the theoretical
development in this textbook and other textbooks:
• Large-sample approach. Because data sets are large, from the outset we use
large-sample normal approximations to sampling distributions for hypothesis
testing and confidence intervals. In our experience, it takes less time to teach
the rudiments of large-sample approximations than to teach the Student
t and exact F distributions, degrees-of-freedom corrections, and so forth.
This large-sample approach also saves students the frustration of discover-
ing that, because of nonnormal errors, the exact distribution theory they just
mastered is irrelevant. Once taught in the context of the sample mean, the
large-sample approach to hypothesis testing and confidence intervals carries
directly through multiple regression analysis, logit and probit, instrumental
variables estimation, and time series methods.
• Random sampling. Because regressors are rarely fixed in econometric appli-
cations, from the outset we treat data on all variables (dependent and inde-
pendent) as the result of random sampling. This assumption matches our
initial applications to cross-sectional data, it extends readily to panel and time
series data, and because of our large-sample approach, it poses no additional
conceptual or mathematical difficulties.
• Heteroskedasticity. Applied econometricians routinely use heteroskedasticity-

robust standard errors to eliminate worries about whether heteroskedasticity
is present or not. In this book, we move beyond treating heteroskedasticity as an
exception or a “problem” to be “solved”; instead, we allow for heteroskedasticity
from the outset and simply use heteroskedasticity-robust standard errors.
We present homoskedasticity as a special case that provides a theoretical
motivation for OLS.
Skilled Producers, Sophisticated Consumers

We hope that students using this book will become sophisticated consumers of empir-
ical analysis. To do so, they must learn not only how to use the tools of regression
analysis but also how to assess the validity of empirical analyses presented to them.
Our approach to teaching how to assess an empirical study is threefold. First,
immediately after introducing the main tools of regression analysis, we devote
Chapter 9 to the threats to internal and external validity of an empirical study.
This chapter discusses data problems and issues of generalizing findings to other
settings. It also examines the main threats to regression analysis, including omit-
ted variables, functional form misspecification, errors-in-variables, selection, and
simultaneity—and ways to recognize these threats in practice.
Second, we apply these methods for assessing empirical studies to the empiri-
cal analysis of the ongoing examples in the book. We do so by considering alterna-
tive specifications and by systematically addressing the various threats to validity
of the analyses presented in the book.
Third, to become sophisticated consumers, students need firsthand experi-
ence as producers. Active learning beats passive learning, and econometrics is
an ideal course for active learning. For this reason, the textbook website features
data sets, software, and suggestions for empirical exercises of different scopes.
Approach to Mathematics and Level of Rigor

Our aim is for students to develop a sophisticated understanding of the tools of
modern regression analysis, whether the course is taught at a “high” or a “low”
level of mathematics. Parts I through IV of the text (which cover the substantive
material) are accessible to students with only precalculus mathematics. Parts I
through IV have fewer equations and more applications than many introductory
econometrics books and far fewer equations than books aimed at mathemati-
cal sections of undergraduate courses. But more equations do not imply a more
sophisticated treatment. In our experience, a more mathematical treatment does
not lead to a deeper understanding for most students.
That said, different students learn differently, and for mathematically well-
prepared students, learning can be enhanced by a more explicitly mathematical
treatment. Part V therefore contains an introduction to econometric theory that
is appropriate for students with a stronger mathematical background. When the
mathematical chapters in Part V are used in conjunction with the material in Parts
I through IV, this book is suitable for advanced undergraduate or master’s level
econometrics courses.
Contents and Organization

There are five parts to Introduction to Econometrics. This textbook assumes that
the student has had a course in probability and statistics, although we review that
material in Part I. We cover the core material of regression analysis in Part II. Parts
III, IV, and V present additional topics that build on the core treatment in Part II.
Part I
Chapter 1 introduces econometrics and stresses the importance of providing
quantitative answers to quantitative questions. It discusses the concept of cau-
sality in statistical studies and surveys the different types of data encountered in
econometrics. Material from probability and statistics is reviewed in Chapters 2
and 3, respectively; whether these chapters are taught in a given course or are
simply provided as a reference depends on the background of the students.
Part II
Chapter 4 introduces regression with a single regressor and ordinary least squares
(OLS) estimation, and Chapter 5 discusses hypothesis tests and confidence inter-
vals in the regression model with a single regressor. In Chapter 6, students learn
how they can address omitted variable bias using multiple regression, thereby esti-
mating the effect of one independent variable while holding other independent
variables constant. Chapter 7 covers hypothesis tests, including F-tests, and confi-
dence intervals in multiple regression. In Chapter 8, the linear regression model is
extended to models with nonlinear population regression functions, with a focus
on regression functions that are linear in the parameters (so that the parameters
can be estimated by OLS). In Chapter 9, students step back and learn how to
identify the strengths and limitations of regression studies, seeing in the process
how to apply the concepts of internal and external validity.
Part III
Part III presents extensions of regression methods. In Chapter 10, students learn
how to use panel data to control for unobserved variables that are constant over
time. Chapter 11 covers regression with a binary dependent variable. Chapter 12
shows how instrumental variables regression can be used to address a variety of
problems that produce correlation between the error term and the regressor, and
examines how one might find and evaluate valid instruments. Chapter 13 intro-
duces students to the analysis of data from experiments and quasi-, or natural,
experiments, topics often referred to as “program evaluation.”
Part IV
Part IV takes up regression with time series data. Chapter 14 focuses on forecast-
ing and introduces various modern tools for analyzing time series regressions,
such as unit root tests and tests for stability. Chapter 15 discusses the use of time
series data to estimate causal relations. Chapter 16 presents some more advanced
tools for time series analysis, including models of conditional heteroskedasticity.
Part V
Part V is an introduction to econometric theory. This part is more than an appendix
that fills in mathematical details omitted from the text. Rather, it is a self-contained
treatment of the econometric theory of estimation and inference in the linear regression
model. Chapter 17 develops the theory of regression analysis for a single regressor;
the exposition does not use matrix algebra, although it does demand a higher level of
mathematical sophistication than the rest of the text. Chapter 18 presents and studies
the multiple regression model, instrumental variables regression, and generalized
method of moments estimation of the linear model, all in matrix form.
Prerequisites Within the Book

Because different instructors like to emphasize different material, we wrote this
book with diverse teaching preferences in mind. To the maximum extent possible,
the chapters in Parts III, IV, and V are “stand-alone” in the sense that they do
not require first teaching all the preceding chapters. The specific prerequisites for
each chapter are described in Table I. Although we have found that the sequence
of topics adopted in the textbook works well in our own courses, the chapters
are written in a way that allows instructors to present topics in a different order
if they so desire.
Sample Courses
This book accommodates several different course structures.
TABLE I Guide to Prerequisites for Special-Topic Chapters in Parts III, IV, and V
Prerequisite parts or chapters
Part I Part II Part III Part IV Part V
10.1, 12.1,
Chapter 1–3 4–7, 9 8 10.2 12.2 14.1–14.4 14.5–14.8 15 17
10 Xa Xa X
a Xa
11 X X
12.1, 12.2 Xa Xa X
a
12.3–12.6 X Xa X X X
13 Xa Xa X X X
a
14 X Xa b
15 Xa Xa b X
16 Xa Xa b X X X
17 X X X
18 X X X X X
This table shows the minimum prerequisites needed to cover the material in a given chapter. For example, estimation of dynamic
causal effects with time series data (Chapter 15) first requires Part I (as needed, depending on student preparation, and except as
noted in footnote a), Part II (except for Chapter 8; see footnote b), and Sections 14.1 through 14.4.
aChapters 10 through 16 use exclusively large-sample approximations to sampling distributions, so the optional Sections 3.6 (the
Student t distribution for testing means) and 5.6 (the Student t distribution for testing regression coefficients) can be skipped.
bChapters 14 through 16 (the time series chapters) can be taught without first teaching Chapter 8 (nonlinear regression functions)
if the instructor pauses to explain the use of logarithmic transformations to approximate percentage changes.
Standard Introductory Econometrics
This course introduces econometrics (Chapter 1) and reviews probability and sta-
tistics as needed (Chapters 2 and 3). It then moves on to regression with a single
regressor, multiple regression, the basics of functional form analysis, and the
evaluation of regression studies (all Part II). The course proceeds to cover regres-
sion with panel data (Chapter 10), regression with a limited dependent variable
(Chapter 11), and instrumental variables regression (Chapter 12), as time permits.
The course concludes with experiments and quasi-experiments in Chapter 13,
topics that provide an opportunity to return to the questions of estimating causal
effects raised at the beginning of the semester and to recapitulate core regression
methods. Prerequisites: Algebra II and introductory statistics.
Introductory Econometrics with Time Series and

Forecasting Applications
Like a standard introductory course, this course covers all of Part I (as needed)
and Part II. Optionally, the course next provides a brief introduction to panel data
(Sections 10.1 and 10.2) and takes up instrumental variables regression (Chapter 12,
or just Sections 12.1 and 12.2). The course then proceeds to Part IV, covering
forecasting (Chapter 14) and estimation of dynamic causal effects (Chapter 15). If
time permits, the course can include some advanced topics in time series analysis
such as volatility clustering and conditional heteroskedasticity (Section 16.5).
Prerequisites: Algebra II and introductory statistics.
Applied Time Series Analysis and Forecasting

This book also can be used for a short course on applied time series and forecast-
ing, for which a course on regression analysis is a prerequisite. Some time is spent
reviewing the tools of basic regression analysis in Part II, depending on student
preparation. The course then moves directly to Part IV and works through forecast-
ing (Chapter 14), estimation of dynamic causal effects (Chapter 15), and advanced
topics in time series analysis (Chapter 16), including vector autoregressions and
conditional heteroskedasticity. An important component of this course is hands-on
forecasting exercises, available to instructors on the book’s accompanying website.
Prerequisites: Algebra II and basic introductory econometrics or the equivalent.
Introduction to Econometric Theory

This book is also suitable for an advanced undergraduate course in which the
students have a strong mathematical preparation or for a master’s level course in
econometrics. The course briefly reviews the theory of statistics and probability as
necessary (Part I). The course introduces regression analysis using the nonmath-
ematical, applications-based treatment of Part II. This introduction is followed by
the theoretical development in Chapters 17 and 18 (through Section 18.5). The
course then takes up regression with a limited dependent variable (Chapter 11)
and maximum likelihood estimation (Appendix 11.2). Next, the course optionally
turns to instrumental variables regression and generalized method of moments
(Chapter 12 and Section 18.7), time series methods (Chapter 14), and the estima-
tion of causal effects using time series data and generalized least squares (Chapter
15 and Section 18.6). Prerequisites: Calculus and introductory statistics. Chapter 18
assumes previous exposure to matrix algebra.
Pedagogical Features
This textbook has a variety of pedagogical features aimed at helping students
understand, retain, and apply the essential ideas. Chapter introductions provide
real-world grounding and motivation, as well as brief road maps highlighting
the sequence of the discussion. Key terms are boldfaced and defined in context
throughout each chapter, and Key Concept boxes at regular intervals recap the
central ideas. General interest boxes provide interesting excursions into related
topics and highlight real-world studies that use the methods or concepts being
discussed in the text. A Summary concluding each chapter serves as a helpful
framework for reviewing the main points of coverage. The questions in the
Review the Concepts section check students’ understanding of the core content,
Exercises give more intensive practice working with the concepts and techniques
introduced in the chapter, and Empirical Exercises allow students to apply what
they have learned to answer real-world empirical questions. At the end of the
textbook, the Appendix provides statistical tables, the References section lists
sources for further reading, and a Glossary conveniently defines many key terms
in the book.
Supplements to Accompany the Textbook

The online supplements accompanying the third edition update of Introduction to
Econometrics include the Instructor’s Resource Manual, Test Bank, and Power-
Point® slides with text figures, tables, and Key Concepts. The Instructor’s Resource
Manual includes solutions to all the end-of-chapter exercises, while the Test
Bank, offered in Testgen, provides a rich supply of easily edited test problems and
questions of various types to meet specific course needs. These resources are avail-
able for download from the Instructor’s Resource Center at www.pearsonhighered
.com/stock_watson.
Companion Website
The Companion Website, found at www.pearsonhighered.com/stock_watson,
provides a wide range of additional resources for students and faculty. These
resources include more and more in depth empirical exercises, data sets for the
empirical exercises, replication files for empirical results reported in the text,
practice quizzes, answers to end-of-chapter Review the Concepts questions and
Exercises, and EViews tutorials.
MyEconLab
The third edition update is accompanied by a robust MyEconLab course. The
MyEconLab course includes all the Review the Concepts questions as well as
some Exercises and Empirical Exercises. In addition, the enhanced eText avail-
able in MyEconLab for the third edition update includes URL links from the
Exercises and Empirical Exercises to questions in the MyEconLab course and to
the data that accompanies them. To register for MyEconLab and to learn more,
log on to www.myeconlab.com.
Acknowledgments
A great many people contributed to the first edition of this book. Our biggest
debts of gratitude are to our colleagues at Harvard and Princeton who used early
drafts of this book in their classrooms. At Harvard’s Kennedy School of Govern-
ment, Suzanne Cooper provided invaluable suggestions and detailed comments
on multiple drafts. As a coteacher with one of the authors (Stock), she also helped
vet much of the material in this book while it was being developed for a required
course for master’s students at the Kennedy School. We are also indebted to two
other Kennedy School colleagues, Alberto Abadie and Sue Dynarski, for their
patient explanations of quasi-experiments and the field of program evaluation
and for their detailed comments on early drafts of the text. At Princeton, Eli
Tamer taught from an early draft and also provided helpful comments on the
penultimate draft of the book.
We also owe much to many of our friends and colleagues in econometrics
who spent time talking with us about the substance of this book and who collec-
tively made so many helpful suggestions. Bruce Hansen (University of Wisconsin–
Madison) and Bo Honore (Princeton) provided helpful feedback on very early
outlines and preliminary versions of the core material in Part II. Joshua Angrist
(MIT) and Guido Imbens (University of California, Berkeley) provided thought-
ful suggestions about our treatment of materials on program evaluation. Our
presentation of the material on time series has benefited from discussions with
Yacine Ait-Sahalia (Princeton), Graham Elliott (University of California, San
Diego), Andrew Harvey (Cambridge University), and Christopher Sims (Princeton).
Finally, many people made helpful suggestions on parts of the manuscript close to
their area of expertise: Don Andrews (Yale), John Bound (University of Michigan),
Gregory Chow (Princeton), Thomas Downes (Tufts), David Drukker (StataCorp.),
Jean Baldwin Grossman (Princeton), Eric Hanushek (Hoover Institution), James
Heckman (University of Chicago), Han Hong (Princeton), Caroline Hoxby
(Harvard), Alan Krueger (Princeton), Steven Levitt (University of Chicago), Richard
Light (Harvard), David Neumark (Michigan State University), Joseph Newhouse
(Harvard), Pierre Perron (Boston University), Kenneth Warner (University of
Michigan), and Richard Zeckhauser (Harvard).
Many people were very generous in providing us with data. The Califor-
nia test score data were constructed with the assistance of Les Axelrod of the
Standards and Assessments Division, California Department of Education. We
are grateful to Charlie DePascale, Student Assessment Services, Massachusetts
Department of Education, for his help with aspects of the Massachusetts test
score data set. Christopher Ruhm (University of North Carolina, Greensboro)
graciously provided us with his data set on drunk driving laws and traffic fatali-
ties. The research department at the Federal Reserve Bank of Boston deserves
thanks for putting together its data on racial discrimination in mortgage lending;
we particularly thank Geoffrey Tootell for providing us with the updated version
of the data set we use in Chapter 9 and Lynn Browne for explaining its policy
context. We thank Jonathan Gruber (MIT) for sharing his data on cigarette sales,
which we analyze in Chapter 12, and Alan Krueger (Princeton) for his help with
the Tennessee STAR data that we analyze in Chapter 13.
We thank several people for carefully checking the page proof for errors.
Kerry Griffin and Yair Listokin read the entire manuscript, and Andrew Fraker,
Ori Heffetz, Amber Henry, Hong Li, Alessandro Tarozzi, and Matt Watson
worked through several chapters.
In the first edition, we benefited from the help of an exceptional development
editor, Jane Tufts, whose creativity, hard work, and attention to detail improved
the book in many ways, large and small. Pearson provided us with first-rate sup-
port, starting with our excellent editor, Sylvia Mallory, and extending through the
entire publishing team. Jane and Sylvia patiently taught us a lot about writing,
organization, and presentation, and their efforts are evident on every page of this
book. We extend our thanks to the superb Pearson team, who worked with us on
the second edition: Adrienne D’Ambrosio (senior acquisitions editor), Bridget
Page (associate media producer), Charles Spaulding (senior designer), Nancy
Fenton (managing editor) and her selection of Nancy Freihofer and Thompson
Steele Inc. who handled the entire production process, Heather McNally (sup-
plements coordinator), and Denise Clinton (editor-in-chief). Finally, we had the
benefit of Kay Ueno’s skilled editing in the second edition. We are also grate-
ful to the excellent third edition Pearson team of Adrienne D’Ambrosio, Nancy
Fenton, and Jill Kolongowski, as well as Mary Sanger, the project manager with
Nesbitt Graphics. We also wish to thank the Pearson team who worked on the
third edition update: Christina Masturzo, Carolyn Philips, Liz Napolitano, and
Heidi Allgair, project manager with Cenveo® Publisher Services.
We also received a great deal of help and suggestions from faculty, students,
and researchers as we prepared the third edition and its update. The changes
made in the third edition incorporate or reflect suggestions, corrections, com-
ments, data, and help provided by a number of researchers and instructors: Don-
ald Andrews (Yale University), Jushan Bai (Columbia), James Cobbe (Florida
State University), Susan Dynarski (University of Michigan), Nicole Eichelberger
(Texas Tech University), Boyd Fjeldsted (University of Utah), Martina Grunow,
Daniel Hamermesh (University of Texas–Austin), Keisuke Hirano (University
of Arizona), Bo Honore (Princeton University), Guido Imbens (Harvard Uni-
versity), Manfred Keil (Claremont McKenna College), David Laibson (Harvard
University), David Lee (Princeton University), Brigitte Madrian (Harvard Uni-
versity), Jorge Marquez (University of Maryland), Karen Bennett Mathis (Flor-
ida Department of Citrus), Alan Mehlenbacher (University of Victoria), Ulrich
Müller (Princeton University), Serena Ng (Columbia University), Harry Patrinos
(World Bank), Zhuan Pei (Brandeis University), Peter Summers (Texas Tech
University), Andrey Vasnov (University of Sydney), and Douglas Young (Mon-
tana State University). We also benefited from student input from F. Hoces dela
Guardia and Carrie Wilson.
Thoughtful reviews for the third edition were prepared for Addison-Wesley
by Steve DeLoach (Elon University), Jeffrey DeSimone (University of Texas at
Arlington), Gary V. Engelhardt (Syracuse University), Luca Flabbi (Georgetown
University), Steffen Habermalz (Northwestern University), Carolyn J. Heinrich
(University of Wisconsin–Madison), Emma M. Iglesias-Vazquez (Michigan State
University), Carlos Lamarche (University of Oklahoma), Vicki A. McCracken
(Washington State University), Claudiney M. Pereira (Tulane University), and
John T. Warner (Clemson University). We also received very helpful input on
draft revisions of Chapters 7 and 10 from John Berdell (DePaul University), Janet
Kohlhase (University of Houston), Aprajit Mahajan (Stanford University), Xia
Meng (Brandeis University), and Chan Shen (Georgetown University).
Above all, we are indebted to our families for their endurance throughout this
project. Writing this book took a long time, and for them, the project must have
seemed endless. They, more than anyone else, bore the burden of this commit-
ment, and for their help and support we are deeply grateful.
1 Economic Questions and Data
A sk a half dozen econometricians what econometrics is, and you could get a half
dozen different answers. One might tell you that econometrics is the science of
testing economic theories. A second might tell you that econometrics is the set of
tools used for forecasting future values of economic variables, such as a firm’s sales,
the overall growth of the economy, or stock prices. Another might say that econo-
metrics is the process of fitting mathematical economic models to real-world data.
A fourth might tell you that it is the science and art of using historical data to make
numerical, or quantitative, policy recommendations in government and business.
In fact, all these answers are right. At a broad level, econometrics is the science
and art of using economic theory and statistical techniques to analyze economic
data. Econometric methods are used in many branches of economics, including
finance, labor economics, macroeconomics, microeconomics, marketing, and eco-
nomic policy. Econometric methods are also commonly used in other social sci-
ences, including political science and sociology.
This book introduces you to the core set of methods used by econometricians.
We will use these methods to answer a variety of specific, quantitative questions
from the worlds of business and government policy. This chapter poses four of those
questions and discusses, in general terms, the econometric approach to answering
them. The chapter concludes with a survey of the main types of data available to
econometricians for answering these and other quantitative economic questions.
1.1 Economic Questions We Examine

Many decisions in economics, business, and government hinge on understanding
relationships among variables in the world around us. These decisions require
quantitative answers to quantitative questions.
This book examines several quantitative questions taken from current issues
in economics. Four of these questions concern education policy, racial bias in
mortgage lending, cigarette consumption, and macroeconomic forecasting.
2 Chapter 1 Economic Questions and Data
Question #1: Does Reducing Class Size Improve

Elementary School Education?
Proposals for reform of the U.S. public education system generate heated debate.
Many of the proposals concern the youngest students, those in elementary schools.
Elementary school education has various objectives, such as developing social
skills, but for many parents and educators, the most important objective is basic
academic learning: reading, writing, and basic mathematics. One prominent pro-
posal for improving basic learning is to reduce class sizes at elementary schools.
With fewer students in the classroom, the argument goes, each student gets more
of the teacher’s attention, there are fewer class disruptions, learning is enhanced,
and grades improve.
But what, precisely, is the effect on elementary school education of reducing
class size? Reducing class size costs money: It requires hiring more teachers and,
if the school is already at capacity, building more classrooms. A decision maker
contemplating hiring more teachers must weigh these costs against the benefits.
To weigh costs and benefits, however, the decision maker must have a precise
quantitative understanding of the likely benefits. Is the beneficial effect on basic
learning of smaller classes large or small? Is it possible that smaller class size actu-
ally has no effect on basic learning?
Although common sense and everyday experience may suggest that more
learning occurs when there are fewer students, common sense cannot provide a
quantitative answer to the question of what exactly is the effect on basic learning
of reducing class size. To provide such an answer, we must examine empirical
evidence—that is, evidence based on data—relating class size to basic learning in
elementary schools.
In this book, we examine the relationship between class size and basic learn-
ing, using data gathered from 420 California school districts in 1999. In the Cali-
fornia data, students in districts with small class sizes tend to perform better on
standardized tests than students in districts with larger classes. While this fact is
consistent with the idea that smaller classes produce better test scores, it might
simply reflect many other advantages that students in districts with small classes
have over their counterparts in districts with large classes. For example, districts
with small class sizes tend to have wealthier residents than districts with large
classes, so students in small-class districts could have more opportunities for
learning outside the classroom. It could be these extra learning opportunities that
lead to higher test scores, not smaller class sizes. In Part II, we use multiple regres-
sion analysis to isolate the effect of changes in class size from changes in other
factors, such as the economic background of the students.
1.1 Economic Questions We Examine 3
Question #2: Is There Racial Discrimination

in the Market for Home Loans?
Most people buy their homes with the help of a mortgage, a large loan secured by
the value of the home. By law, U.S. lending institutions cannot take race into
account when deciding to grant or deny a request for a mortgage: Applicants who
are identical in all ways except their race should be equally likely to have their
mortgage applications approved. In theory, then, there should be no racial bias in
mortgage lending.
In contrast to this theoretical conclusion, researchers at the Federal Reserve
Bank of Boston found (using data from the early 1990s) that 28% of black appli-
cants are denied mortgages, while only 9% of white applicants are denied. Do
these data indicate that, in practice, there is racial bias in mortgage lending? If so,
how large is it?
The fact that more black than white applicants are denied in the Boston Fed
data does not by itself provide evidence of discrimination by mortgage lenders
because the black and white applicants differ in many ways other than their race.
Before concluding that there is bias in the mortgage market, these data must be
examined more closely to see if there is a difference in the probability of being
denied for otherwise identical applicants and, if so, whether this difference is
large or small. To do so, in Chapter 11 we introduce econometric methods that
make it possible to quantify the effect of race on the chance of obtaining a mort-
gage, holding constant other applicant characteristics, notably their ability to
repay the loan.
Question #3: How Much Do Cigarette Taxes

Reduce Smoking?
Cigarette smoking is a major public health concern worldwide. Many of the costs
of smoking, such as the medical expenses of caring for those made sick by smoking
and the less quantifiable costs to nonsmokers who prefer not to breathe secondhand
cigarette smoke, are borne by other members of society. Because these costs are
borne by people other than the smoker, there is a role for government intervention
in reducing cigarette consumption. One of the most flexible tools for cutting
consumption is to increase taxes on cigarettes.
Basic economics says that if cigarette prices go up, consumption will go down.
But by how much? If the sales price goes up by 1%, by what percentage will the
quantity of cigarettes sold decrease? The percentage change in the quantity
demanded resulting from a 1% increase in price is the price elasticity of demand.
If we want to reduce smoking by a certain amount, say 20%, by raising taxes, then
we need to know the price elasticity of demand to calculate the price increase
necessary to achieve this reduction in consumption. But what is the price elasticity
of demand for cigarettes?
Although economic theory provides us with the concepts that help us answer
this question, it does not tell us the numerical value of the price elasticity of
demand. To learn the elasticity, we must examine empirical evidence about the
behavior of smokers and potential smokers; in other words, we need to analyze
data on cigarette consumption and prices.
The data we examine are cigarette sales, prices, taxes, and personal income
for U.S. states in the 1980s and 1990s. In these data, states with low taxes, and thus
low cigarette prices, have high smoking rates, and states with high prices have low
smoking rates. However, the analysis of these data is complicated because causal-
ity runs both ways: Low taxes lead to high demand, but if there are many smokers
in the state, then local politicians might try to keep cigarette taxes low to satisfy
their smoking constituents. In Chapter 12, we study methods for handling this
“simultaneous causality” and use those methods to estimate the price elasticity of
cigarette demand.
Question #4: By How Much Will U.S. GDP

Grow Next Year?
It seems that people always want a sneak preview of the future. What will sales be
next year at a firm that is considering investing in new equipment? Will the stock
market go up next month, and, if it does, by how much? Will city tax receipts next
year cover planned expenditures on city services? Will your microeconomics
exam next week focus on externalities or monopolies? Will Saturday be a nice day
to go to the beach?
One aspect of the future in which macroeconomists are particularly interested
is the growth of real economic activity, as measured by real gross domestic product
(GDP), during the next year. A management consulting firm might advise a man-
ufacturing client to expand its capacity based on an upbeat forecast of economic
growth. Economists at the Federal Reserve Board in Washington, D.C., are man-
dated to set policy to keep real GDP near its potential in order to maximize
employment. If they forecast anemic GDP growth over the next year, they might
expand liquidity in the economy by reducing interest rates or other measures, in
an attempt to boost economic activity.
Professional economists who rely on precise numerical forecasts use econo-
metric models to make those forecasts. A forecaster’s job is to predict the future
1.2 Causal Effects and Idealized Experiments 5
by using the past, and econometricians do this by using economic theory and
statistical techniques to quantify relationships in historical data.
The data we use to forecast the growth rate of GDP are past values of GDP
and the “term spread” in the United States. The term spread is the difference
between long-term and short-term interest rates. It measures, among other things,
whether investors expect short-term interest rates to rise or fall in the future. The
term spread is usually positive, but it tends to fall sharply before the onset of a
recession. One of the GDP growth rate forecasts we develop and evaluate in
Chapter 14 is based on the term spread.
Quantitative Questions, Quantitative Answers

Each of these four questions requires a numerical answer. Economic theory pro-
vides clues about that answer—for example, cigarette consumption ought to go
down when the price goes up—but the actual value of the number must be learned
empirically, that is, by analyzing data. Because we use data to answer quantitative
questions, our answers always have some uncertainty: A different set of data
would produce a different numerical answer. Therefore, the conceptual frame-
work for the analysis needs to provide both a numerical answer to the question
and a measure of how precise the answer is.
The conceptual framework used in this book is the multiple regression model,
the mainstay of econometrics. This model, introduced in Part II, provides a math-
ematical way to quantify how a change in one variable affects another variable,
holding other things constant. For example, what effect does a change in class size
have on test scores, holding constant or controlling for student characteristics (such
as family income) that a school district administrator cannot control? What effect
does your race have on your chances of having a mortgage application granted,
holding constant other factors such as your ability to repay the loan? What effect
does a 1% increase in the price of cigarettes have on cigarette consumption, hold-
ing constant the income of smokers and potential smokers? The multiple regres-
sion model and its extensions provide a framework for answering these questions
using data and for quantifying the uncertainty associated with those answers.
1.2 Causal Effects and Idealized Experiments

Like many other questions encountered in econometrics, the first three questions
in Section 1.1 concern causal relationships among variables. In common usage, an
action is said to cause an outcome if the outcome is the direct result, or consequence,
of that action. Touching a hot stove causes you to get burned; drinking water
causes you to be less thirsty; putting air in your tires causes them to inflate; putting
fertilizer on your tomato plants causes them to produce more tomatoes. Causality
means that a specific action (applying fertilizer) leads to a specific, measurable
consequence (more tomatoes).
Estimation of Causal Effects

How best might we measure the causal effect on tomato yield (measured in kilo-
grams) of applying a certain amount of fertilizer, say 100 grams of fertilizer per
square meter?
One way to measure this causal effect is to conduct an experiment. In that
experiment, a horticultural researcher plants many plots of tomatoes. Each plot
is tended identically, with one exception: Some plots get 100 grams of fertilizer
per square meter, while the rest get none. Moreover, whether a plot is fertilized
or not is determined randomly by a computer, ensuring that any other differences
between the plots are unrelated to whether they receive fertilizer. At the end of
the growing season, the horticulturalist weighs the harvest from each plot. The
difference between the average yield per square meter of the treated and
untreated plots is the effect on tomato production of the fertilizer treatment.
This is an example of a randomized controlled experiment. It is controlled in
the sense that there are both a control group that receives no treatment (no fertil-
izer) and a treatment group that receives the treatment (100 g/m2 of fertilizer). It
is randomized in the sense that the treatment is assigned randomly. This random
assignment eliminates the possibility of a systematic relationship between, for
example, how sunny the plot is and whether it receives fertilizer so that the only
systematic difference between the treatment and control groups is the treatment.
If this experiment is properly implemented on a large enough scale, then it will
yield an estimate of the causal effect on the outcome of interest (tomato produc-
tion) of the treatment (applying 100 g/m2 of fertilizer).
In this book, the causal effect is defined to be the effect on an outcome of a
given action or treatment, as measured in an ideal randomized controlled experi-
ment. In such an experiment, the only systematic reason for differences in out-
comes between the treatment and control groups is the treatment itself.
It is possible to imagine an ideal randomized controlled experiment to answer
each of the first three questions in Section 1.1. For example, to study class size,
one can imagine randomly assigning “treatments” of different class sizes to differ-
ent groups of students. If the experiment is designed and executed so that the only
systematic difference between the groups of students is their class size, then in
1.3 Data: Sources and Types 7
theory this experiment would estimate the effect on test scores of reducing class
size, holding all else constant.
The concept of an ideal randomized controlled experiment is useful because
it gives a definition of a causal effect. In practice, however, it is not possible to
perform ideal experiments. In fact, experiments are relatively rare in economet-
rics because often they are unethical, impossible to execute satisfactorily, or pro-
hibitively expensive. The concept of the ideal randomized controlled experiment
does, however, provide a theoretical benchmark for an econometric analysis of
causal effects using actual data.
Forecasting and Causality

Although the first three questions in Section 1.1 concern causal effects, the
fourth—forecasting the growth rate of GDP—does not. You do not need to know
a causal relationship to make a good forecast. A good way to “forecast” whether
it is raining is to observe whether pedestrians are using umbrellas, but the act of
using an umbrella does not cause it to rain.
Even though forecasting need not involve causal relationships, economic
theory suggests patterns and relationships that might be useful for forecasting. As
we see in Chapter 14, multiple regression analysis allows us to quantify historical
relationships suggested by economic theory, to check whether those relationships
have been stable over time, to make quantitative forecasts about the future, and
to assess the accuracy of those forecasts.
1.3 Data: Sources and Types

In econometrics, data come from one of two sources: experiments or nonexperi-
mental observations of the world. This book examines both experimental and
nonexperimental data sets.
Experimental Versus Observational Data

Experimental data come from experiments designed to evaluate a treatment or
policy or to investigate a causal effect. For example, the state of Tennessee
financed a large randomized controlled experiment examining class size in the
1980s. In that experiment, which we examine in Chapter 13, thousands of students
were randomly assigned to classes of different sizes for several years and were
given standardized tests annually.
Another random document with
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slight but extremely vivid side-lights, but which (having been written
on shipboard) may perhaps be taken with the grain of palliative salt
which should frequently be cast upon the condemnatory utterances
of sea-weary, if not sea-sick, passengers on the raging deep when
they regard everything connected with the odious ship which
confines them. We are introduced to this colonial woman of affairs in
the sub-title of the journal, which states that the journey to New
Netherland was made “in a small Flute-ship called the Charles, of
which Thomas Singleton was Master; but the superior Authority over
both Ship and Cargo was in Margaret Filipse, who was the Owner of
both, and with whom we agreed for our Passage from Amsterdam to
New York, in New Netherland, at seventy-five Guilders for each
Person, payable in Holland.”
This “Margaret Filipse” was the daughter of Adolph Hardenbrook
who settled in Bergen, opposite New Amsterdam. She was the
widow of the merchant trader Peter Rudolphus De Vries when she
married Frederick Philipse. Her second husband was a carpenter by
trade, who worked for Governor Stuyvesant; but on his marriage with
the wealthy Widow De Vries, he became her capable business
partner, and finally was counted the richest man in the colony. She
owned ships running to many ports, and went repeatedly to Holland
in her own ships as supercargo. She was visited by Dankers in
Amsterdam in June, 1679. According to the custom of his religious
sect, he always called her by her Christian name, and wrote of her
as Margaret. He says:—
“We spoke to Margaret, inquiring of her when the ship
would leave. She answered she had given orders to have
everything in readiness to sail to-day, but she herself was of
opinion it would not be before Monday. We offered her the
money to pay for our passage, but she refused to receive it at
that time, saying she was tired and could not be troubled with
it that day.”
They waited patiently on shipboard for several days for Madam
Philipse to embark, and at last he writes:—
“We were all very anxious for Margaret to arrive, so that we
might not miss a good wind. Jan and some of the other
passengers were much dissatisfied. Jan declared, ‘If this wind
blows over I will write her a letter that will make her ears
tingle.’”
Landing at an English port, the travellers bought wine and vinegar,
“for we began to see it would go slim with us on the voyage,” and
Margaret bought a ship which was made ready to go to the Isle of
May and then to the Barbadoes. Over the purchase and equipment
of this ship arose a great quarrel, for “those miserable, covetous
people Margaret and her husband” tried to take away the Charles’
long-boat because timber for a new one was cheaper in New York
than in Falmouth, England. Naturally, the passengers objected to
crossing the Atlantic without a ship’s-boat. Dankers complained
further of Margaret’s “miserable covetousness,”—that she made the
ship lay to for an hour and a half and sent out the jolly-boat to pick
up a ship’s mop or swab worth six cents; and the carpenter swore
because she had not furnished new leather and spouts for the
pumps. Dankers explained at length the enhancement of the Philipse
profits through some business arrangement and preferment with the
Governor, by which Frederick Philipse became the largest trader with
the Five Nations at Albany, had a profitable slave-trade with Africa,
and, it is asserted, was in close bonds with the Madagascar pirates.
Whether “Margaret” favored this trade with the pirates is not known;
but it could probably be said of her trade, as of many others in the
colony, that it was hard to draw the dividing line between privateering
and piracy.
Her calling was not singular in New Amsterdam. The little town
abounded in women-traders.
Elizabeth Van Es was the daughter of one of the early Albany
magistrates. She married Gerrit Bancker, and on becoming a widow
removed to New York, where she promptly opened a store on her
own account, and conducted it with success till her death, in 1694. In
the inventory of her effects were a share in a brigantine, a large
quantity of goods and peltries, as well as various silver-clasped
Bibles, gold and stone rings, and silver tankards and beakers,
showing her success in her business career. The wife of the great
Jacob Leisler, a Widow Vanderveen when he married her, was a
trader. Lysbet, the widow of Merchant Reinier, became the wife of
Domine Drisius, of New York. She carried on for many years a
thriving trade on what is now Pearl Street, near Whitehall Street, and
was known to every one as Mother Drisius. The wife of Domine Van
Varick also kept a small store, and thus helped out her husband’s
salary.
Heilke Pieterse was the wife of the foremost blacksmith of New
Amsterdam; and as he monopolized the whole business of Long
Island, he died very rich,—worth at least ten thousand dollars. Not
overwhelmed or puffed up with the inheritance of such opulence,
Heilke carried on her husband’s business for many years with
success.
Margaret Backer was another successful business woman. For
years she acted as attorney for her husband while he was in foreign
countries attending to that end of his great foreign trade. Rachel
Vinje, involved in heavy lawsuits over the settlement of an estate,
pleaded her own case in court, and was successful. Women were
constant in their appearance in court as parties in contracts and
agreements.
The Schuyler family did not lack examples of stirring women-kind.
Margaret van Schlictenhorst, wife of the first Peter Schuyler, being
left a widow, managed her husband’s estate in varied business lines
with such thrift and prudence that in her will, made at eighty years of
age, she could assert that the property had vastly increased. She
was not out of public affairs, for during the Leisler troubles she was
the second largest subscriber to the fund in support of the
government; and she also lent money to pay the borrowed soldiers.
Her niece, Heligonda van Schlictenhorst, a shrewd spinster, was a
merchant, and furnished public supplies. The daughter of Peter
Schuyler married John Collins. A letter of his, dated 1722, shows her
capacity. I quote a clause from it:—
“Since you left us my wife has been in the Indian country,
and Van Slyck had purchased what he could at the upper end
of the land; she purchased the rest from Ignosedah to his
purchase. She has gone through a great deal of hardship and
trouble about it, being from home almost ever since you left
us; and prevailed with the Indians whilst there with trouble
and expense to mark out the land where the mine is into the
woods. Mrs. Feathers has been slaving with her all this while,
and hard enough to do with that perverse generation, to bring
them to terms.”
The picture of these two women in the wilds, treating and
bargaining and trading with the savages, seems curious enough to
us to-day. Women seem to have excelled in learning the Indian
languages. The daughter of Anneke Jans was the best interpreter in
the colony, and served as interpreter to Stuyvesant during his
famous treaty with the Six Nations.
Many of the leading taverns or hostelries were kept by women,—a
natural calling, certainly, for good housewives. Madam Van Borsum
was mistress of the Ferry Tavern in Breucklen. Annetje Litschar kept
the tavern which stood near the present site of Hanover Square.
Metje Wessell’s hostelry stood on the north side of Pearl Street, near
Whitehall Street.
More successful still and bold in trade was Widow Maria Provoost.
Scarce a ship came into port from Holland, England, the
Mediterranean, West Indies, or the Spanish Main, but brought to her
large consignments of goods. Her Dutch business correspondence
was a large one. She, too, married a second time, and, as Madam
James Alexander, filled a most dignified position, and became the
mother of Lord Stirling.
In a letter written by her husband, James Alexander, to his brother
William, and dated October 21, 1721, there is found a passage
which gives extraordinary tribute to her business capacity and her
powers of endurance alike. It reads thus:—
“Two nights agoe at eleven o’clock, my wife was Brought to
bed of a Daughter and is in as good health as can be
Expected, and does more than can be Expected of any
woman, for till within a few hours of her being brought to bed
She was in her Shop, and ever Since has given the price of
Goods to her prentice, who comes to her and asks it when
Customers come in. The very next day after She was brought
to bed she Sold goods to above thirty pounds value. And here
the business matters of her Shop which is Generally
Esteemed the best in New York, she with a prentice of about
16 years of age perfectly well manages without the Least help
from me, you may guess a little of her success.”
He closes his letter with a eulogy which can be cordially endorsed
by every reader:
“I must say my fortune in America is above my Expectation,
and I think even my Deserts, and the greatest of my good
fortune is in getting so Good a Wife as I have, who alone
would make ae man easy and happy had he nothing else to
depend on.”
Madam Alexander accumulated great wealth, and spent it
handsomely. She was the only person in town, besides the
Governor, who kept a coach. Her will is an interesting document, and
shows a fine style of housekeeping. The enumeration of great and
lesser drawing-rooms, front and back parlors, blue and gold leather
room, green and gold leather room, tapestry room, chintz room, etc.,
show its pretension and extent. She lived on Broad Street, had a fine
garden laid out in the Dutch taste, a house full of servants, and spent
her money freely as she made it thriftily. A very good portrait of her
exists. It shows an interesting countenance, with fine features, a
keen eye, and indicating robust health. She is not dressed with great
elegance, wearing the costume of the day,—a commonplace frilled
cap, folded kerchief, close sleeves, such as we are familiar with in
portraits of English women of her time.
Jane Colden, the daughter of Governor Cadwallader Colden, was
of signal service, not in trade, but in science. A letter written by her
father explains her interest and usefulness:—
“Botany is an amusement which may be made agreeable to
the ladies who are often at a loss to fill up their time. Their
natural curiosity and the pleasure they take in the beauty and
variety of dress seem to fit them for it.
“I have a daughter who has an inclination to reading, and a
curiosity for Natural Philosophy or Natural History, and a
sufficient curiosity for attaining a competent knowledge. I took
the pains to explain Linnæus’ system, and to put it into an
English form for her use by freeing it from technical terms,
which was easily done, by using two or three words in the
place of one. She is now grown very fond of the study, and
has made such a progress in it as, I believe, would please
you, if you saw her performance. Though she could not have
been persuaded to learn the terms at first, she now
understands to some degree Linnæus’ characters,—
notwithstanding she does not understand Latin. She has
already a pretty large volume in writing of the description of
plants. She has shewn a method of taking the impression of
the leaves on paper with printers’ ink, by a simple kind of
rolling press which is of use in distinguishing the species. No
description in words alone, can give so clear an idea, as when
assisted with a picture. She has the impression of three
hundred plants in the manner you’ll see by the samples. That
you may have some conception of her performance, and her
manner of describing, I propose to enclose some samples in
her own writing, some of which I think are new genera.”
Peter Collinson said she was the first lady to study the Linnæan
system, and deserved to have her name celebrated; and John Ellis,
writing of her to Linnæus in 1758, asks that a genus be named, for
her, Coldenella. She was also a correspondent of Dr. Whyte of
Edinburgh, and many learned societies in Europe. Walter Rutherfurd
enumerates her talents, and caps them with a glowing tribute to her
cheese-making.
We find the women of the times full of interest in public affairs and
active in good works. In the later days of the province, we learn of
the gifts to the army at Crown Point in 1755. In those days the
generous farmers of Queens County, Long Island, collected one
thousand and fifteen sheep, and these were “cheerfully given.”
“While their husbands at Great Neck were employed in getting
sheep, the good mothers in that neighborhood in a few hours
collected nearly seventy good large cheeses, and sent them to New
York to be forwarded with the sheep to the army.” Kings County
defrayed the expense of conveying these sheep and cheeses to the
army; and a letter of gratitude was promptly returned by the
commander-in-chief. Sir William Johnson, who said,—
“This generous humanity is unanimously and gratefully
applauded here by all. We pray that your benevolence may
be returned to you by the great Shepherd of the human kind a
thousand fold. And may those amiable housewives to whose
skill we owe the refreshing cheeses long continue to shine in
their useful and endearing stations.”
Kings County and Suffolk also sent cheeses, and we learn also:—
“The Women of County Suffolk ever good in such
Occasions are knitting several large bags of stockings and
mittens to be sent to the poorer soldiers at Forts William
Henry and Edward.”
In studying the history of the province, I am impressed with the
debt New Yorkers of Dutch descent owe, not to their forefathers, but
to their foremothers; the conspicuous decorum of life of these
women and their great purity of morals were equalled by their good
sense and their wonderful capacity in both domestic and public
affairs. They were as good patriots as they were good business
women; and though they were none of them what Carlyle calls
“writing-women,” it was not from poverty of good sense or natural
intelligence, but simply from the imperfection of their education
through lack of good and plentiful schools, and also want of stimulus
owing to absence of literary atmosphere.
A very shrewd woman-observer, writing in the middle of the
eighteenth century of the Dutch, gives what seems to me a very just
estimate and good description of one of their traits. She says:
“Though they have no vivacity, they are smarter, a great deal
smarter, than the English, that is, more uptaking.” Those who know
the exact Scotch meaning of “uptaking,” which is somewhat
equivalent to Anthony Trollope’s “observation and reception,” will
understand the closeness of the application of the term to the Dutch.
The Dutch women especially were “uptaking;” adaptive of all
comfort-bringing methods of housekeeping. This was noted by
Guicciardini in Holland as early as 1563. They were far advanced in
knowledge and execution of healthful household conditions, through
their beautiful cleanliness. Irving says very truthfully of them: “In
those good days of simplicity and sunshine a passion for cleanliness
was the leading principle in domestic economy, and the universal
test of a good housewife.” Kalm says: “They are almost over nice
and cleanly in regard to the floor, which is frequently scoured twice a
week.” They found conditions of housekeeping entirely changed in
America, but the passionate love of cleanliness fostered in the
Fatherland clung long in their hearts. Their “Œconomy” and thrift
were also beautiful.
An advertisement in the “New York Gazette” of April 1, 1751,
shows that the thrift of the community lingered until Revolutionary
times:—
“Elizabeth Boyd gives notice that she will as usual graft
Pieces in knit Jackets and Breeches not to be discern’d, also
to graft and foot Stockings, and Gentlemens Gloves, mittens
or Muffatees made out of old Stockings, or runs them in the
Heels. She likewise makes Childrens Stockings out of Old
Ones.”
Other dames taught more elegant accomplishments:—
“Martha Gazley, now in the city of New York, Makes and
Teacheth the following curious Works, viz.: Artificial Fruit and
Flowers and other Wax-Work, Nun’s Work, Philligree and
Pencil-work upon Muslin, all sorts of Needlework, and Raising
of Paste, as also to Paint upon Glass, and Transparent for
Sconces with other Works. If any young Gentlewomen, or
others, are inclined to learn any or all of the above-mentioned
curious Works, they may be carefully taught and instructed in
the same by said Martha Gazley.”
Mrs. Van Cortlandt, in her delightful account of home-life in
Westchester County, says of the industrious Dutch women and their
accomplishments and occupations:—
“Knitting was an art much cultivated, the Dutch women
excelling in the variety and intricacy of the stitches. A knitting
sheath, which might be of silver or of a homely goose-quill,
was an indispensable utensil, and beside it hung the ball-pin-
cushion. Crewel-work and silk embroidery were fashionable,
and surprisingly pretty effects were produced. Every little
maiden had her sampler, which she began with the alphabet
and numerals following them with a Scriptural text or verse of
a metrical psalm. Then fancy was let loose on birds, beasts,
and trees. Most of the old families possessed framed pieces
of embroidery, the handiwork of female ancestors. Flounces
and trimmings for aprons worked with delicately tinted silks on
muslin were common. I have several yards of fine muslin
painted in the early days with full-blown thistles in the
appropriate colors. Fringe looms were in use, and cotton and
silk fringes were woven.”
Tape-looms were also found in many households; and the weaving
of tapes and “none-so-prettys” was deemed very light and elegant
work.
Though to the Dutch is ascribed the invention of the thimble, I
never think of the Dutch women as excelling in fine needlework; and
I note that the teachers of intricate and novel embroidery-stitches are
always Englishwomen; but in turn the English goodwives must yield
to the Dutch the palm of comfortable, attractive housewifery, as well
as shrewd, untiring business capacity.
CHAPTER IX
THE COLONIAL WARDROBE
The Dutch goodwife worked hard from early morn till sunset. She
worked in restricted ways, she had few recreations and pleasures
and altogether little variety in her life; but she possessed what
doubtless proved to her in that day, as it would to any woman in this
day, a source of just satisfaction, a soothing to the spirit, a staying of
melancholy, a moral support second only to the solace of religion,—
namely, a large quantity of very good clothes, which were
substantial, cheerful, and suitable, if not elegant.
The Dutch never dressed “in a plaine habbit according to the
maner of a poore wildernesse people,” as the Connecticut colonists
wrote of themselves to Charles II.; nor were they weary wanderers in
a wilderness as were Connecticut folk.
I have not found among the statutes of New Netherland any
sumptuary laws such as were passed in Connecticut,
Massachusetts, and Virginia, to restrain and attempt to prohibit
luxury and extravagance in dress. Nor have I discovered in the court-
records any evidences of magisterial reproof of finery; there is, on
the contrary, much indirect proof of encouragement to “dress orderly
and well according to the fashion and the time.” Of course the Dutch
had no Puritanical dread of over-rich garments; and we must also
never forget New Netherland was not under the control of a
government nor of a religious band, but of a trading-company.
The ordinary dress of the fair dames and damsels of New
Amsterdam has been vividly described by Diedrich Knickerbocker;
and even with the additional light upon their wardrobe thrown by the
lists contained in colonial inventories, I still think his description of
their every-day dress exceedingly good for one given by a man. He
writes:
“Their hair, untortured by the abominations of art, was
scrupulously pomatumed back from their foreheads with a
candle, and covered with a little cap of quilted calico, which
fitted exactly to their heads. Their petticoats of linsey-woolsey
were striped with a variety of gorgeous dyes, though I must
confess those gallant garments were rather short, scarce
reaching below the knee; but then they made up in the
number, which generally equalled that of the gentlemen’s
small-clothes; and what is still more praiseworthy, they were
all of their own manufacture,—of which circumstance, as may
well be supposed, they were not a little vain.
“Those were the honest days, in which every woman
stayed at home, read the Bible, and wore pockets,—ay, and
that, too, of a goodly size, fashioned with patchwork into
many curious devices, and ostentatiously worn on the
outside. These, in fact, were convenient receptacles where all
good housewives carefully stored away such things as they
wished to have at hand; by which means they often came to
be incredibly crammed.
“Besides these notable pockets, they likewise wore scissors
and pincushions suspended from their girdles by red ribbons,
or, among the more opulent and showy classes, by a brass
and even silver chains, indubitable tokens of thrifty
housewives and industrious spinsters. I cannot say much in
vindication of the shortness of the petticoats; it doubtless was
introduced for the purpose of giving the stockings a chance to
be seen, which were generally of blue worsted, with
magnificent red clocks; or perhaps to display a well-turned
ankle and a neat though serviceable foot, set off by a high-
heeled leathern shoe, with a large and splendid silver buckle.
“There was a secret charm in those petticoats, which no
doubt entered into the consideration of the prudent gallants.
The wardrobe of a lady was in those days her only fortune;
and she who had a good stock of petticoats and stockings
was as absolutely an heiress as is a Kamtschatka damsel
with a store of bear-skins, or a Lapland belle with plenty of
reindeer.”
A Boston lady, Madam Knights, visiting New York in 1704, wrote:
—
“The English go very fashionable in their dress. But the
Dutch, especially the middling sort, differ from our women, in
their habitt go loose, wear French muches wch are like a
Capp and head-band in one, leaving their ears bare, which
are sett out with jewells of a large size and many in number;
and their fingers hoop’t with rings, some with large stones in
them of many Coullers, as were their pendants in their ears,
which you should see very old women wear as well as
Young.”
This really gives a very good picture of the vrouws; “loose in their
habit,” wearing sacques and loose gowns, not laced in with pointed
waists as were the English and Boston women; with the ornamental
head-dress, and the gay display of stoned earrings and rings, which
was also not the usual wear of New England women, who generally
owned only a few funeral rings.
In the inventories of personal estates contained in the Surrogate’s
Court we find details of the wardrobe; but as I have enumerated and
defined all the different articles at some length in my book, “Costume
of Colonial Times,” I will not repeat the definitions here; but it should
be remembered that in the enumeration of the articles of clothing,
many stuffs and materials of simple names were often of
exceedingly good and even rich quality. From those inventories we
have proof that all Dutch women had plenty of clothes; while the
wives of the burgomasters, the opulent merchants, and those in
authority, had rich clothes. I have given in full in my book a list of the
clothing of a wealthy New York dame, Madam De Lange; but I wish
to refer to it again as an example of a really beautiful wardrobe. In it
were twelve petticoats of varying elegance, some worth two pounds
fifteen shillings each, which would be more than fifty dollars to-day.
They were of silk lined with silk, striped stuff, scarlet cloth, and ash-
gray cloth. Some were trimmed with gold lace. With those petticoats
were worn samares and samares-a-potoso, six in number, which
were evidently jackets or fancy bodies; these were of calico, crape,
“tartanel,” and silk. One trimmed with lace was worth three pounds.
Waistcoats and bodies also appear; also fancy sleeves. Love-hoods
of silk and cornet-caps with lace make a pretty head-gear to
complete this costume, with which was worn the reim or silver girdle
with hanging purse, and also with a handsome number of diamond,
amber, and white coral jewels.
The colors in the Dutch gowns were almost uniformly gay,—in
keen contrast to the sad-colored garments of New England. Madam
Cornelia de Vos in a green cloth petticoat, a red and blue
“Haarlamer” waistcoat, a pair of red and yellow sleeves, and a purple
“Pooyse” apron was a blooming flower-bed of color.
The dress of Vrouentje Ides Stoffelsen, a very capable
Dutchwoman who went to Bergen Point to live, varied a little from
that of these town dames. Petticoats she had, and waistcoats,
bodies and sleeves; but there was also homelier attire,—purple and
blue aprons, four pairs of pattens, a fur cap instead of love-hoods,
and twenty-three caps. She wore the simpler and more universal
head-gear,—a close linen or calico cap.
The head covering was of considerable importance in New
Amsterdam, as it was in Holland as well as in England at that date.
We find that it was also costly. In 1665 Mistress Piertje Jans sold a
fine “little ornamental headdress” for fifty-five guilders to the young
daughter of Evert Duyckinck. But it seems that Missy bought this
“genteel head-clothes” without the knowledge or permission of her
parents, and on its arrival at the Duyckinck home Vrouw Duyckinck
promptly sent back the emblem of extravagance and disobedience.
Summoned to court by the incensed milliner who wished no rejected
head-dresses on her hands, and who claimed that the transaction
was from the beginning with full cognizance of the parents, Father
Duyckinck pronounced the milliner’s bill extortionate; and
furthermore said gloomily, with a familiar nineteenth-century
phraseology of New York fathers, that “this was no time to be buying
and wearing costly head-dresses.” But the court decided in the
milliner’s favor.
It is to be deplored that we have no fashion-plates of past
centuries to show to us in exact presentment the varying modes
worn by New York dames from year to year; that method of fashion-
conveying has been adopted but a century. The modes in olden days
travelled from country to country, from town to town, in the form of
dolls or “babies,” as they were called, wearing miniature model
costumes. These dolls were dressed by cutters and tailors in Paris or
London, and with various tiny modish garments were sent out on
their important mission across the water. In Venice a doll attired in
the last fashions—the toilette of the year—was for centuries
exhibited on each Ascension Day at the “Merceria” for the edification
of noble Venetian dames, who eagerly flocked to the attractive sight.
Not less eagerly did American dames flock to provincial mantua-
makers and milliners to see the London-dressed babies with their
miniature garments. Even in this century, fashions were brought to
New York and Philadelphia and Albany through “milliners’ boxes”
containing dressed dolls. Mrs. Vanderbilt tells of one much admired
fashion-doll of her youth who had a treasured old age as a juvenile
goddess.
A leading man of New Amsterdam, a burgomaster, had at the time
of his death, near the end of Dutch rule, this plentiful number of
substantial garments: a cloth coat with silver buttons, a stuff coat,
cloth breeches, a cloth coat with gimp buttons, a black cloth coat, a
silk coat, breeches and doublet, a silver cloth breeches and doublet,
a velvet waistcoat with silver lace, a buff coat with silk sleeves, three
“gross-green” cloaks, several old suits of clothes, linen, hosiery,
silver-buckled shoes, an ivory-headed cane, and a hat. One hat may
seem very little with so many other garments; but the real beaver
hats of those days were so substantial, so well-made, so truly worthy
an article of attire, that they could be constantly worn and yet last for
years. They were costly; some were worth several pounds apiece.
Gayer masculine garments are told of in other inventories: green
silk breeches flowered with silver and gold, silver gauze breeches,
yellow fringed gloves, lacquered hats, laced shirts and neck-cloths,
and (towards the end of the century, and nearly through the
eighteenth century) a vast variety of wigs. For over a hundred years
these unnatural abominations, which bore no pretence of resembling
the human hair, often in grotesque, clumsy, cumbersome shapes,
bearing equally fantastic names, and made of various indifferent and
coarse materials, loaded the heads and lightened the pockets of our
ancestors. I am glad to note that they were taxed by the government
of the province of New York. The barber and wig-maker soon
became a very important personage in a community so given over to
costly modes of dressing the head. Advertisements in the
newspapers show the various kinds of wigs worn in the middle of the
eighteenth century. From the “New York Gazette” of May 9, 1737, we
learn of a thief’s stealing “one gray Hair Wig, one Horse hair wig not
the worse for wearing, one Pale Hair Wig, not worn five times,
marked V. S. E., one brown Natural wig, One old wig of goat’s hair
put in buckle.” Buckle meant to curl; and derivatively a wig was in
buckle when it was rolled on papers for curling. Other
advertisements tell of “Perukes, Tets, and Fox-tails after the
Genteelest Fashion. Ladies’ Tets and wigs in perfect imitation of their
own hair.” Other curious notices are of “Orange Butter” for
“Gentlewomen to comb up their hair with.”
This use of orange butter as a pomatum was certainly unique; it
was really a Dutch marmalade. I read in my “Closet of Rarities,”
dated 1706:—
“The Dutch Way to make Orange-butter. Take new cream
two gallons, beat it up to a thicknesse, then add half a pint of
orange-flower-water, and as much red wine, and so being
become the thicknesse of butter it has both the colour and
smell of an orange.”
A very characteristic and eye-catching advertisement was this
from the “New York Gazette” of May 21, 1750:—
“This is to acquaint the Public, that there is lately arrived
from London the Wonder of the World, an Honest Barber and
Peruke Maker, who might have worked for the King, if his
Majesty would have employed him: It was not for the want of
Money he came here, for he had enough of that at Home, nor
for the want of Business, that he advertises hinself, BUT to
acquaint the Gentlemen and Ladies, That Such a Person is
now in Town, living near Rosemary Lane where Gentlemen
and Ladies may be supplied with Goods as follows, viz.: Tyes,
Full-Bottoms, Majors, Spencers, Fox-Tails, Ramalies, Tacks,
cut and bob Perukes: Also Ladies Tatematongues and Towers
after the Manner that is now wore at Court. By their Humble
and Obedient Servant,
“John Still.”
With the change from simple Dutch ways of hairdressing came in
other details more constrained modes of dressing. With the wig-
maker came the stay-maker, whose curious advertisements may be
read in scores in the provincial newspapers; and his arbitrary
fashions bring us to modern times.
From the deacons’ records of the Dutch Reformed Church at
Albany we catch occasional hints of the dress of the children of the
Dutch colonists. There was no poor-house, and few poor; but since
the church occasionally helped worthy folk who were not rich, we
find the deacons in 1665 and 1666 paying for blue linen for
schorteldoecykers, or aprons, for Albany kindeken; also for haaken
en oogen, or hooks and eyes, for warm under-waists called
borsrockyen. They bought linen for luyers, which were neither
pinning-blankets nor diapers, but a sort of swaddling clothes, which
evidently were worn then by Dutch babies. Voor-schooten, which
were white bibs; neerstucken, which were tuckers, also were worn
by little children. Some little Hans of Pieter had given to him by the
deacons a fine little scarlet aperock, or monkey-jacket; and other
children were furnished linen cosynties, or night-caps with capes.
Yellow stockings were sold at the same time for children, and a gay
little yellow turkey-legged Dutchman in a scarlet monkey-jacket and
fat little breeches must have been a jolly sight.
CHAPTER X
HOLIDAYS
The most important holidays of the early years of the colony were,
apparently, New Year’s Day and May Day, for we find them named
through frequent legislation about rioting on these days, repairing of
damages, etc. It has been said that New Yorkers owe to the Dutch
an everlasting gratitude for our high-stoop houses and the delights of
over two centuries of New Year’s calling. The latter custom lived long
and happily in our midst, died a lingering and lamented death, is still
much honored in our memory, and its extinction deeply deplored and
unwillingly accepted.
The observance of New Year’s Day was, without doubt, followed
by both Dutch and English from the earliest settlement. We know
that Governor Stuyvesant received New Year’s calls, and we also
know that he prohibited excessive “drunken drinking,” unnecessary
firing of guns, and all disorderly behavior on that day. The reign of
the English did not abolish New Year’s visits; and we find Charles
Wolley, an English chaplain, writing in his journal in New York in
1701, of the addition of the English custom of exchange of gifts:—
“The English in New York observed one anniversary custom
and that without superstition, I mean the strenarum
commercium, as Suetonius calls them, a neighborly
commerce of presents every New Year’s Day. Some would
send me a sugar-loaf, some a pair of gloves, some a bottle or
two of wine.”
A further celebration of the day by men in New York was by going
in parties to Beekman’s Swamp to shoot at turkeys.
New Year’s calling was a new fashion to General Washington
when he came to New York to live for a short time, but he adopted it
with approval; and his New Year’s Receptions were imposing
functions.
For a long time the New Year was ushered in, in country towns,
with great noise as well as rejoicing. All through the day groups of
men would go from house to house firing salutes, and gathering
gradually into large parties by recruits from each house until the end
of the day was spent in firing at a mark. The Legislature in March,
1773, attempted to stop the gun-firing, asserting that “great damages
are frequently done on the eve of the last day of December and on
the first and second days of January by persons going from house to
house with guns and other firearms.” In 1785 a similar enactment
was passed by the State Legislature.
In the palmiest days of New Year’s calling, New York City
appeared one great family reunion. Every wheeled vehicle in the
town seemed to be loaded with visitors going from house to house.
Great four and six horse stages packed with hilarious mobs of men
went to the house of every acquaintance of every one in the stage.
Target companies had processions; political bodies called on families
whose head was well known in political life. The newspaper-carriers
brought out addresses yards long with rhymes:—
“The day devoted is to mirth,

And now around the social hearth
Friendship unlocks her genial springs,
And Harmony her lyre now strings.
While plenty spreads her copious hoard,
And piles and crowns the festive board,”
etc., etc., for hundreds of lines.

The “copious hoard” of substantial food, with decanters of wine,
bowls of milk punch, and pitchers of egg-nog, no longer “crown the
festive board” on New Year’s Day; but we still have New Year’s
Cakes, though not delivered by singing bakers’ ’prentices as of yore.
May Day was observed in similar fashion,—by firing of guns, gay
visiting, and also by the rearing of maypoles.
A very early mention of a maypole is in June, 1645, when one
William Garritse had “sung a libellous song” against Rev. Francis
Doughty, the preacher at Flushing, Long Island, and was sentenced
in punishment therefor to be tied to the maypole, which in June was
still standing. Stuyvesant again forbade “drunken drinking,” and firing
of guns and planting of maypoles, as productive of bad practices. I
don’t know whether the delight of my childhood, and of generations
of children in Old and New England up to this present May Day on
which I am now writing,—the hanging of May baskets,—ever made
happy children in New York.
There was some observance in New York of Shrovetide as a
holiday-time. As early as 1657 we find the sober Beverwyck
burghers deliberating on “some improprieties committed at the house
of Albert de Timmerman on Shrovetide last.” As was the inevitable
custom followed by the extremely uninventive brain of the
seventeenth and eighteenth century rioter, were he Dutch or English,
these “improprieties” took the form of the men’s parading in women’s
clothes; Pieter Semiensen was one of the masqueraders. Two years
later the magistrates were again investigating the “unseemly and
scandalous” celebration of Shrovetide; and as ever before, the youth
of early Albany donned women’s clothes and “marched as
mountebanks,” as the record says, just as they did in Philadelphia
and Baltimore and even in sober Boston. We find also for sale in
Beverwyck at this time, noisy Shrovetide toys—rommelerytiens, little
“rumbling-pots,” which the youth and children doubtless keenly
enjoyed.
At an early date Shrovetide observances, such as “pulling the
goose,” were prohibited by Governor Stuyvesant in New York. A mild
protest on the part of some of the burgomasters against this order of
the Governor brought forth one of Stuyvesant’s characteristically
choleric edicts in answer, in which he speaks of having “interdicted
and forbidden certain farmers’ servants to ride the goose at the feast
of Backus and Shrovetide ... because it is altogether unprofitable,
unnecessary, and criminal for subjects and neighbors to celebrate
such pagan and popish feasts and to practise such customs,
notwithstanding the same may in some places of Fatherland be
tolerated and looked at through the fingers.” Domine Blom, of
Kingston or Wyltwyck, joined in the governor’s dislike of the game.
But there were some of the magistrates who liked very well to “pull
the goose” themselves, so it is said. It was a cruel amusement. The
thoroughly greased goose was hung between two poles, and the
effort of the sport was to catch, snatch away, and hold fast the poor
creature while passing at great speed. In Albany in 1677 all
“Shrovetide misdemeanors were prohibited, viz.: riding at a goose,
cat, hare, and ale.” The fine was twenty-five guilders in sea-want.
What the cat, hare, and ale part of the sport was, I do not know.
In New York by the middle of the eighteenth century Shrove
Tuesday was firmly assigned to cocking-mains. The De Lanceys
were patrons of this choice old English sport. Cock-gaffs of silver
and steel were freely offered for sale in New York and Maryland
newspapers, and on Shrove Tuesday in 1770 Jacob Hiltzeheimer
attended a famous cock-fight on the Germantown road. We cannot
blame honest New Yorkers if they did not rise above such rude
sports, when cock-fighting and cock-throwing and cock-squoiling and
cock-steling obtained everywhere in Old England at Shrovetide;
when school-boys had cock-fights in their school-rooms; and in
earlier days good and learned old Roger Ascham ruined himself by
betting on cock-fights, and Sir Thomas More boasted proudly of his
skill in “casting a cock-stele.”
Mr. Gabriel Furman, writing in 1846, told of an extraordinary
observance of Saint Valentine’s Day by the Dutch—one I think
unknown in folk-lore—which obtained on Long Island among the
early settlers. It was called Vrouwen dagh, or Women’s day, and was
thus celebrated: Every young girl sallied forth in the morning armed
with a heavy cord with knotted end. She gave to every young man
whom she met several smart lashes with the knotted cord. Perhaps
these were “love-taps,” and were given with no intent of stinging.
Judge Egbert Benson wrote, in 1816, that in New York this custom
dwindled to a similar Valentine observance by New York children,
when the girls chased the boys with many blows. In one school the
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orders. Happily, the “Motherly Countenance” was not moved to
wrath, and “the divine condescension was manifested.” “If the coffins
can be moved, move them,” she said; “but so long as they are not in
the main room, I do not greatly mind their remaining.” They were all
removed, however, and the Old Buddha was protected from possibly
evil influences.
On the 8th September, at Hsin Chou, three Imperial (yellow) chairs
had been provided by the local officials, so that their Majesties’
entrance into T’ai-yüan fu, on the 10th, was not unimposing. The
Court took up its residence in the Governor’s Yamên (that same
bloodstained building in which, six weeks before, Yü Hsien had
massacred the missionaries). Yü Hsien, the Governor, met their
Imperial Majesties outside the city walls, and knelt by the roadside
as the Old Buddha’s palanquin came up. She bade her bearers stop,
and called to him to approach. When he had done so, she said: “At
your farewell audience, in the last Moon of the last year, you assured
me that the Boxers were really invulnerable. Alas! You were wrong,
and now Peking has fallen! But you did splendidly in carrying out my
orders and in ridding Shansi of the whole brood of foreign devils.
Everyone speaks well of you for this, and I know, besides, how high
is your reputation for good and honest work. Nevertheless, and
because the foreign devils are loudly calling for vengeance upon
you, I may have to dismiss you from office, as I had to do with Li
Ping-heng: but be not disturbed in mind, for, if I do this, it is only to
throw dust in the eyes of the barbarians, for our own ends. We must
just bide our time, and hope for better days.”
Yü Hsien kowtowed, as in duty bound, nine times, and replied:
“Your Majesty’s slave caught them as in a net, and allowed neither
chicken nor dog to escape: yet am I ready to accept punishment and
dismissal from my post. As to the Boxers, they have been defeated
because they failed to abide by the laws of the Order, and because
they killed and plundered innocent people who were not Christians.”
This conversation was clearly heard by several bystanders, one of
whom reported it in a letter to Shanghai. When Yü Hsien had
finished speaking, the Old Buddha sighed, and told her bearers to
proceed. A few days later she issued the first of the Expiatory
Decrees by which Yü Hsien and other Boxer leaders were dismissed
from office, but not before she had visited the courtyard where the
hapless missionaries had met their fate, and cross-examined Yü
Hsien on every detail of that butchery. And it is recorded, that, while
she listened eagerly to this tale of unspeakable cowardice and
cruelty, the Heir Apparent was swaggering noisily up and down the
courtyard, brandishing the huge sword given him by Yü Hsien, with
which his devil’s work had been done. No better example could be
cited of this remarkable woman’s primitive instincts and elemental
passion of vindictiveness.
Once more, during the Court’s residence at T’ai-yüan, did the Old
Buddha and Yü Hsien meet. At this audience, realising the
determination of the foreigners to exact the death penalty in this
case, and realising also the Governor’s popularity with the
inhabitants of T’ai-yüan, she told him, with unmistakable
significance, that the price of coffins was rising, a plain but
euphemistic hint that he would do well to commit suicide before a
worse fate overtook him.
Her Majesty was much gratified at the splendid accommodation
provided for her at T’ai-yüan, and particularly pleased to see all the
gold and silver vessels and utensils that had been made in 1775 for
Ch’ien Lung’s progress to the sacred shrines of Wu-T’ai shan; they
had been polished up for the occasion and made a brave show, so
that the “Benevolent Countenance” beamed with delight. “We have
nothing like this in Peking,” she said.
Marble Bridge in the Grounds of the Lake Palace.
Photo, Betines, Peking.
In the Grounds of the Palace in the Western Park.
Photo, Betines, Peking.

Jung Lu joined the Court on the day after its arrival at T’ai-yüan,
and was most affectionately welcomed by the Old Buddha, to whom
he gave a full account of his journey through Chihli and of the
widespread devastation wrought by the Boxers. He had previously
sent in the following Memorial which clearly reflects those qualities
which had endeared him to his Imperial Mistress, and which so
honourably distinguished him from the sycophants and classical
imbeciles of the Court:—
“At dawn, on the 21st day of the 7th Moon (15th August)
your Majesty’s servant proceeded to the Gate of Reverend
Peace (inside the Palace), and learned that your Majesties’
sacred chariot had left for the West. While there I came
across Ch’ung Ch’i,[106] the President of the Board of
Revenue, and we were proposing to hurry after your
Majesties, when we learned that the North-Eastern and
Northern Gates of the city had fallen. So we left Peking by
another gate, my first object being to try and rally some of the
troops. But after several conferences with Generals Sung
Ch’ing and Tung Fu-hsiang, I was forced to the conclusion
that our repeated defeats had been too severe, and that, in
the absence of large reinforcements, there was no hope of
our being able to take the field again. Our men were in a state
of complete panic and had lost all stomach for fighting. I
therefore left and came on to Pao-t’ing fu, and lodged there
with Ch’ung Ch’i in the “Water Lily” Garden. All night long he
and I discussed the situation, hoping to see some way out of
the misfortunes which had overtaken the State. Ch’ung Ch’i
could not conceal the bitterness of his grief, and on the
morning of the next day he hanged himself in one of the outer
courtyards, leaving a letter for me in which was enclosed his
valedictory Memorial to your Majesties, together with a set of
verses written just before his death. These I now forward for
your Majesty’s gracious perusal, because I feel that his
suicide deserves your pity, just as his high sense of duty
merits your praise. He was indeed a man of the purest
integrity, and had all the will, though, alas, not the power, to
avert the misfortunes which have befallen us. He had always
looked upon the magic arts of the Boxers with profound
contempt, unworthy even of the effort of a smile from a wise
man. At this critical juncture, the loss of my trusted colleague
is indeed a heavy blow, but I am compelled to remember that
the position which I hold, all unworthily, as your Majesty’s
Commander-in-Chief, necessitates my bearing the burden of
my heavy responsibilities so long as the breath of life is in my
body.
“Such makeshift arrangements as were feasible I made for
the temporary disposal of Ch’ung Ch’i’s remains, and I now
forward the present Memorial by special courier to your
Majesty, informing you of the manner of his decease, because
I hold it to be unfitting that his end should pass unnoticed and
unhonoured. Your Majesty will, no doubt, determine on the
posthumous honours to be accorded to him.
“It is now my intention to proceed, with what speed I may, to
T’ai-yüan fu, there to pay my reverent duty to your Majesty
and to await the punishment due for my failure to avert these
calamities.”
In reply to this Memorial, Tzŭ Hsi conferred high posthumous

honours upon Ch’ung Ch’i, praising his loyalty and honesty.
Jung Lu proceeded on his journey, but at a town on the Chihli
border his wife took ill and died. She had only joined him at Pao-t’ing
fu. The Old Buddha welcomed him with sincere affection upon his
arrival at T’ai-yüan and raised his secondary wife, the Lady Liu, to
the rank of “Fu Jen” or legitimate consort. (This lady had always had
great influence with the Empress Dowager, which increased during
the exile of the Court, and became most noticeable after the return to
Peking.)
Tzŭ Hsi asked Jung Lu for his advice as to her future policy.
Bluntly, as was his wont, he replied “Old Buddha, there is only one
way. You must behead Prince Tuan and all the rest of the Princes
and Ministers who misled you and then you must return to Peking.”
An incident, vouched for by a high Manchu official attached to the
Court, illustrates the relations at this time existing between the
Emperor, the Empress Dowager, and Jung Lu. When the latter
reached T’ai-yüan fu, Kuang-Hsü sent a special messenger to
summon him. “I am glad you have come at last,” said His Majesty. “I
desire that you will have Prince Tuan executed without delay.”
“How can I do so without the Empress Dowager’s orders?” he
replied. “The days are past when no other Decree but your Majesty’s
was needed.”[107]
Jung Lu’s position, but for the high favour of the Empress
Dowager, would have been full of danger, for he was disliked by
reactionaries and reformers alike; surrounded by extremists, his
intuitive common sense, his doctrine of the “happy mean” had made
him many enemies. Nor could he lay claim to a reputation for that
“purest integrity” which he had so greatly admired in his colleague
Ch’ung Ch’i. At T’ai-yüan fu, he was openly denounced to the Old
Buddha for having connived in the embezzlements of a certain Ch’en
Tsê-lin, who had been robbing the military Treasury on a grand
scale. Jung Lu had ordered that his defalcations be made good, but
subsequently informed the Throne that the money had been
captured by the Allies, and the accusing Censor did not hesitate to
say that the price of his conversion (brought to his quarters by the
hands of a sergeant named Yao) had been forty thousand taels of
silver, twenty pounds of best birdnests, and four cases of silk. The
Empress Dowager shelved the Memorial, as was her wont, though
no doubt she used the information for the ultimate benefit of her privy
purse. Jung Lu also received vast sums of money and many
valuable presents on his birthday, and at the condolence ceremonies
for the death of his wife, so much so that he incurred the fierce
jealousy of the chief eunuch Li Lien-ying, who was doing his best at
this time to re-feather his own nest, despoiled by the troops of the
Allies.
At T’ai-yüan fu, so many officials had joined the Court that
intrigues became rife; there was much heartburning as to
precedence and status. Those who had borne the burden and heat
of the day, the dangers and the hardships of the flight from Peking,
claimed special recognition and seniority at the hands of their
Imperial Mistress. Each of these thought they should be privileged
above those of equal rank who had only rejoined the Court when all
danger was past, and still more so above those who were now
hurrying up from the provinces in search of advancement.
The chief topic of discussion at audience, and at meetings of the
Grand Council, was the question of the Court’s return to Peking, or
of the removal of the Capital to one of the chief cities of the South or
West. Chang Chih-tung had put in a Memorial, strongly
recommending the city of Tang-Yang in Hupei, on account of its
central position. One of the arguments gravely put forward by the
“scholarly bungler” for this proposal was, that the characters “Tang-
Yang” (which mean “facing south”) were in themselves of good
augury, and an omen of better days to come, because the Emperor
always sits with his face to the south. Chang’s enemies at Court saw
in this idea a veiled hint that the Emperor should be restored to
power.
But Jung Lu was now facile princeps in the Old Buddha’s
counsels, and at audience his colleagues of the Grand Council (Lu
Ch’uan-lin and Wang Wen-shao) followed his lead implicitly. He
never ceased to advise the Empress to return forthwith to Peking,
and, when at a later date she decided on this step, it was rather
because of her faith in his sound judgment than because of the
many Memorials sent in from other high officials. During the Court’s
stay at T’ai-yüan fu, argument on this subject was continual, but
towards the end of September rumours reached Her Majesty that the
Allies were sending a swift punitive expedition to avenge the
murdered missionaries; this decided her to leave at once for Hsi-an
fu, where she would feel safe from further pursuit. The Court left
accordingly on the 30th September; but as the preservation of “face”
before the world is a fundamental principle, with Empresses as with
slave-girls, in China, her departure was announced in the following
brief Edict:—
“As Shansi province is suffering from famine, which makes

it very difficult to provide for our needs, and as the absence of
telegraphic communication there causes all manner of
inconvenient delays, we are compelled to continue our
progress westwards to Hsi-an.”
The journey into Shensi was made with all due provision for the
dignity and comfort of their Majesties, but the Empress was
overcome by grief en route at the death of Kang Yi, chief patron of
the Boxers, and the most bigoted and violent of all the reactionaries
near the Throne. He fell ill at a place called Hou Ma, and died in
three days, although the Vice-President of the Board of Censors, Ho
Nai-ying, obtained leave to remain behind and nurse him. The Old
Buddha was most reluctant to leave the invalid, and showed unusual
emotion. After his death she took a kindly interest in his son (who
followed the Court to Hsi-an) and would frequently speak to him of
his father’s patriotism and loyalty.
At Hsi-an fu the Court occupied the Governor’s official residence,
into which Her Majesty removed after residing for a while in the
buildings formerly set apart for the temporary accommodation of the
Viceroy of Kansuh and Shensi on visits of inspection. Both Yamêns
had been prepared for Their Majesties’ use; the walls had been
painted Imperial red, and the outer Court surrounded with a palisade,
beyond which were the quarters of the Imperial Guards, and the
makeshift lodgings of the Metropolitan Boards and the officials of the
nine Ministries on Palace duty. The arrangements of the Court,
though restricted in the matter of space, were on much the same
lines as in Peking. The main hall of the “Travelling Palace” was left
empty, the side halls being used as ante-chambers for officials
awaiting audience. Behind the main hall was a room to which access
was given by a door with six panels, two of which were left open,
showing the Throne in the centre of the room, upholstered in yellow
silk. It was here that Court ceremonies took place. On the left of this
room was the apartment where audiences were held daily, and
behind this again were the Empress Dowager’s bedroom and private
sitting-room. The Emperor and his Consort occupied a small
apartment communicating with the Old Buddha’s bedroom, and to
the west of these again were three small rooms, occupied by the
Heir Apparent. The chief eunuch occupied the room next to that of
the Old Buddha on the east side. The general arrangements for the
comfort and convenience of the Court were necessarily of a
makeshift and provisional character and the Privy Purse was for a
time at a low ebb, so that Her Majesty was much exercised over the
receipt and safe custody of the tribute, in money and in kind, which
came flowing in from the provinces. So long as the administration of
her household was under the supervision of Governor Ts’en, the
strictest economy was practised; for instance, the amount allowed by
him for the upkeep of their Majesties’ table was two hundred taels
(about £25) per day, which, as the Old Buddha remarked on one
occasion, was about one-tenth of the ordinary expenditure under the
same heading at Peking. “We are living cheaply now,” she said; to
which the Governor replied, “The amount could still be reduced with
advantage.”
Her Majesty’s custom, in selecting the menus for the day, was to
have a list of about one hundred dishes brought in every evening by
the eunuch on duty. After the privations of the flight from Peking, the
liberal supply of swallows’ nests and bêche-de-mer which came in
from the South was very much appreciated, and her rough fare of
chickens and eggs gave way to recherché menus; but the Emperor,
as usual, limited himself to a diet of vegetables. She gave orders that
no more than half a dozen dishes should be served at one meal, and
she took personal pains with the supply of milk, of which she always
consumed a considerable quantity. Six cows were kept in the
immediate vicinity of the Imperial apartments, for the feeding of
which Her Majesty was charged two hundred taels a month. Her
health was good on the whole, but she suffered from indigestion,
which she attributed to the change of climate and the fatigues of her
journey. For occasional attacks of insomnia she had recourse to
massage, in which several of the eunuchs were well-skilled. After the
Court had settled down at Hsi-an fu, Her Majesty was again
persuaded to permit the presentation of plays, which she seemed
generally to enjoy as much as those in Peking. But her mind was for
ever filled with anxiety as to the progress of the negotiations with the
foreign Powers at the Capital, and all telegrams received were
brought to her at once. The news of the desecration of her Summer
Palace had filled her with wrath and distress, especially when, in
letters from the eunuch Sun (who had remained in charge at
Peking), she learned that her Throne had been thrown into the lake,
and that the soldiers had made “lewd and ribald drawings and
writings” even on the walls of her bedroom. It was with the greatest
relief that she heard of the settlement of the terms of peace,
subsequently recorded in the Protocol of 7th of September, and so
soon as these terms had been irrevocably arranged, she issued a
Decree (June, 1901) fixing the date for the Court’s return in
September. This Decree, issued in the name of the Emperor, was as
follows:
“Our Sacred Mother’s advanced age renders it necessary

that we should take the greatest care of her health, so that
she may attain to peaceful longevity; a long journey in the
heat being evidently undesirable, we have fixed on the 19th
day of the 7th Moon to commence our return journey, and are
now preparing to escort Her Majesty, viâ Honan.”
One of the most notorious Boxer leaders, namely, Duke Kung, the
younger brother of Prince Chuang, had accompanied the Court, with
his family, to Hsi-an. The Old Buddha, realising that his presence
would undoubtedly compromise her, now decided to send him away.
His family fell from one state of misery to another; no assistance was
rendered to them by any officials on the journey, and eventually, after
much wandering, the Duke was compelled to earn a bare living by
serving as a subordinate in a small Yamên, while his wife, who was
young and comely, was sold into slavery. It was clear that the Old
Buddha had now realised the error of her ways and the folly that had
been committed in encouraging the Boxers. After the executions and
suicides of the proscribed leaders of the movement she was heard
on one occasion to remark: “These Princes and Ministers were wont
to bluster and boast, relying upon their near kinship to ourselves,
and we foolishly believed them when they assured us that the
foreign devils would never get the better of China. In their folly they
came within an ace of overthrowing our Dynasty. The only one
whose fate I regret is Chao Shu-ch’iao. For him I am truly sorry.”
The fate of Prince Chuang’s brother showed clearly that both
officials and people had realised the genuine change in the Empress
Dowager’s feelings towards the Boxers, for there was none so poor
to do him honour.
Both on the journey to Hsi-an fu and on the return to the Capital,
Her Majesty displayed the greatest interest in the lives of the
peasantry and the condition of the people generally. She subscribed
liberally to the famine fund in Shansi, professing the greatest
sympathy for the stricken people. She told the Emperor that she had
never appreciated their sufferings in the seclusion of her Palace.
During the Court’s stay at Hsi-an fu the Emperor came to take
more interest in State affairs than he had done at any time since the
coup d’état, but although the Old Buddha discussed matters with him
freely, and took his opinion, he had no real voice in the decision of
any important matter. His temper continued to be uncertain and
occasionally violent, so that many high officials of the Court preferred
always to take their business to the Empress Dowager. One
important appointment was made at this time by the Old Buddha at
the Emperor’s personal request, viz., that of Sun Chia-nai (ex-
Imperial tutor) to the Grand Secretariat. This official had resigned
office in January 1900 upon the selection of the Heir Apparent, which
he regarded as equivalent to the deposition of the Emperor.[108]
Subsequently, throughout the Boxer troubles, he had remained in his
house at Peking, which was plundered, and he himself would
undoubtedly have been killed, but for the protection given him by
Jung Lu. At this time also, Lu Ch’uan-lin joined the Grand Council.
When the siege of the Legations began, he had left his post as
Governor of Kiangsu, and marched north with some three thousand
men to defend Peking against the foreigners. Before he reached the
Capital, however, it had fallen, so that, after disbanding his troops,
he went for a few weeks to his native place in Chihli, and thence
proceeded to join the Court at T’ai-yüan fu, where the Old Buddha
received him most cordially. His case is particularly interesting in that
he was until his death a member of the Grand Council,[109] and that,
like many other high officials at Peking, his ideas of the art of
government and the relative position of China in the world, remained
exactly as they were before the Boxer movement. His action in
proceeding to Peking with his troops from his post in the south is
also interesting, as showing the semi-independent position of
provincial officials, and the free hand which any man of strong views
may claim and enjoy. The Viceroys of Nanking and Wuch’ang might
dare to oppose the wishes of the Empress Dowager, and to exercise
their own judgment as regards declaring war upon foreigners, but it
was equally open to any of their subordinates to differ from them,
and to take such steps as they might personally consider proper,
even to the movement of troops.
An official, one of the many provincial deputies charged with the
carrying of tribute to the Court at Hsi-an, returning thence to his post
at Soochow, sent to a friend at Peking a detailed description of the
life of the Court in exile, from which the following extracts are taken.
The document, being at that time confidential and not intended for
publication, throws some light on the Court and its doings which is
lacking in official documents:—
“The Empress Dowager is still in sole charge of affairs, and

controls everything in and around the Court; those who
exercise the most influence with her are Jung Lu and Lu
Ch’uan-lin. Governor Ts’en, has fallen into disfavour of late.
His Majesty’s advisers are most anxious that she should
return to Peking. She looks very young and well; one would
not put her age at more than forty, whereas she is really sixty-
four. The Emperor appears to be generally depressed, but he
has been putting on flesh lately. The Heir Apparent is fifteen
years of age; fat, coarse-featured, and of rude manners. He
favours military habits of deportment and dress, and to see
him when he goes to the play, wearing a felt cap with gold
braid, a leather jerkin, and a red military overcoat, one would
take him for a prize-fighter. He knows all the young actors and
rowdies, and associates generally with the very lowest
classes. He is a good rider, however, and a very fair musician.
If, at the play-houses, the music goes wrong, he will
frequently get up in his place and rebuke the performer, and
at times he even jumps on to the stage, possesses himself of
the instrument, and plays the piece himself. All this brings the
boy into disrepute with respectable people, and some of his
pranks have come to the ears of the Old Buddha, who they
say has had him severely whipped. His last offence was to
commence an intrigue with one of the ladies-in-waiting on Her
Majesty, for which he got into serious trouble. He is much in
the company of Li Lien-ying (the chief eunuch), who leads him
into the wildest dissipation.[110] My friend Kao, speaking of
him the other day, wittily said, that ‘from being an expectant
Emperor, he would soon become a deposed Heir Apparent’;
which is quite true, for he never reads, all his tastes are
vicious, and his manners rude and overbearing. To give you
an instance of his doings: on the 18th of the 10th Moon,
accompanied by his brother and by his uncle, the Boxer Duke
Lan, and followed by a crowd of eunuchs, he got mixed up in
a fight with some Kansu braves at a theatre in the temple of
the City God. The eunuchs got the worst of it, and some
minor officials who were in the audience were mauled by the
crowd. The trouble arose, in the first instance, because of the
eunuchs attempting to claim the best seats in the house, and
the sequel shows to what lengths of villainy these fellows will
descend, and how great is their influence with the highest
officials. The eunuchs were afraid to seek revenge on the
Kansu troops direct, but they attained their end by
denouncing the manager of the theatre to Governor Ts’en,
and by inducing him to close every theatre in Hsi-an. Besides
which, the theatre manager was put in a wooden collar, and
thus ignominiously paraded through the streets of the city.
The Governor was induced to take this action on the ground
that Her Majesty, sore distressed at the famine in Shansi and
the calamities which have overtaken China, was offended at
these exhibitions of unseemly gaiety; and the proclamation
which closed the play-houses, ordered also that restaurants
and other places of public entertainment should suspend
business. Everybody in the city knew that this was the work of
the eunuchs. Eventually Chi Lu, Chamberlain of the
Household, was able to induce the chief eunuch to ask the
Old Buddha to give orders that the theatres be reopened. This
was accordingly done, but of course the real reason was not
given, and the Proclamation stated that, since the recent fall
of snow justified hopes of a prosperous year and good
harvests, as a mark of the people’s gratitude to Providence,
the theatres would be reopened as usual, ‘but no more
disturbances must occur.’
“The chief eunuch does not seem to be abusing his
authority as much as usual at Hsi-an, most of his time and
attention being given to the collection and safe keeping of
tribute. If the quality and quantity received is not up to his
expectations, he will decline to accept it, and thus infinite
trouble is caused to the officials of the province concerned.
“A few days before the Old Buddha’s sixty-fifth birthday in
the 10th Moon, Governor Ts’en proposed that the city should
be decorated, and the usual costly gifts should be presented
to Her Majesty, but to this proposal Prince P’u Tung took the
strongest exception; ‘China is in desperate straits,’ he said,
‘and even the ancestral shrines and birthplaces of the
Dynasty are in the hands of foreign troops. How then could
the Old Buddha possibly desire to celebrate her birthday? The
thing is impossible.’ The matter was therefore allowed to drop.
But the Governor is certainly most anxious to make a name
for himself, and, in spite of his blustering professions of an
independent attitude, he does not disdain to curry favour with
the chief eunuch and others who can serve him. They say
that he has recently sworn ‘blood brotherhood’ with Hsin, the
eunuch whose duty it is to announce officials at audiences.
No doubt it is due to this distinguished connection that he has
recently been raised to the rank of a Board President, and
therefore entitled to ride in a sedan chair within the precincts
of the Court, which, no doubt, he considers more dignified
than riding in a cart.[111]
“Tung Fu-hsiang has returned to his home in Kansu, but his
troops remain still at Hsi-an under the command of General
Teng, who so greatly distinguished himself in the Mahomedan
rebellion.
“It would seem that the Old Buddha still cherishes hopes of
defeating the foreigners, for she is particularly delighted by a
Memorial which has been sent in lately by Hsia Chen-wu, in
which he recommends a certain aboriginal tribesman (‘Man-
tzu’) as a man of remarkable strategic ability. He offers to lose
his own head and those of all his family, should this Heaven-
sent warrior fail to defeat all the troops of the Allies in one final
engagement, and he begs that the Emperor may permit this
man to display his powers and thus save the Empire.”
XXI
HOW THE BOXER LEADERS DIED
China’s officials may be said to be a class of individualists,

incapable, as a rule, of collective heroism or any sustained effort of
organised patriotism; but it is one of the remarkable features and
results of her system of philosophy that the mandarins, even those
who have been known publicly to display physical cowardice at
critical moments, will usually accept sentence of death at the hands
of their Sovereign with perfect equanimity, and meet it with calm
philosophic resignation. The manner in which the Boxer leaders
died, who were proscribed in the course of the negotiations for the
peace Protocol at Peking, affords an interesting illustration of this
fact; incidentally it throws light also on a trait in the Chinese
character, which to some extent explains the solidity and
permanence of its system of government, based as it is on the
principle of absolute obedience and loyalty to the head of the State
as one of the cardinal Confucian virtues.
Despite the repeated and unswerving demands of the foreign
Powers that the death penalty should be inflicted upon the chief
leaders and supporters of the Boxers, the Empress Dowager was
naturally loth to yield, inasmuch as she herself had been in full
sympathy with the movement. It was only after many and prolonged
meetings with her chief advisers, and when she realised that in this
course lay her only hope of obtaining satisfactory terms of peace,
that she finally and most reluctantly consented, in February 1901, to
the issue of a Decree (drafted by Jung Lu) in which she abandoned
to their fate those who, with her full knowledge and approval, had led
the rising which was to drive all foreigners into the sea. With the
knowledge in our possession as to Her Majesty’s complicity, and in
some cases her initiative, in the anti-foreign movement, it is
impossible to read this Decree without realising something of the
ruthlessness of the woman and her cynical disregard of everything
except her own safety and authority. Even so, however, Tzŭ Hsi
could not bring herself at first to comply with all the demands of the
Powers, evidently hoping by compromise and further negotiations to
save the lives of her favourites, Prince Tuan, Duke Lan and Chao
Shu-ch’iao. The Decree, issued in the Emperor’s name, was as
follows:—
“In the summer of last year, the Boxer Rebellion arose,

which brought in its train hostilities with friendly Powers.
Prince Ch’ing and Li Hung-chang have now definitely settled
the preliminary conditions of the Peace Protocol. Reflecting
on the causes of this disaster, we cannot escape the
conclusion that it was due to the ignorance and arrogance of
certain of our Princes and Ministers of State who, foolishly
believing in the alleged supernatural power of the Boxers,
were led to disobey the Throne and to disregard our express
commands that these rebels should be exterminated. Not only
did they not do this, but they encouraged and assisted them
to such an extent that the movement gained hosts of
followers. The latter committed acts of unprovoked hostility,
so that matters reached a pass where a general cataclysm
became inevitable. It was by reason of the folly of these men
that General Tung, that obstinate braggart, dared to bombard
the Legations, thus bringing our Dynasty to the brink of the
greatest peril, throwing the State into a general convulsion of
disorder, and plunging our people into uttermost misery. The
dangers which have been incurred by Her Majesty the
Empress Dowager, and myself are simply indescribable, and
our hearts are sore, aching with unappeased wrath at the
remembrance of our sufferings. Let those who brought about
these calamities ask themselves what punishment can suffice
to atone for them?
“Our former Decrees on this subject have been far too
lenient, and we must therefore now award further
punishments to the guilty. Prince Chuang, already cashiered,
led the Boxers in their attack upon the French Cathedral and
the Legations, besides which, it was he who issued a
Proclamation in violation of all our Treaties. (This refers to the
rewards offered for the heads of foreigners.) He too it was
who, acting as the leader of the savage Boxers, put to death
many innocent persons. As a mark of clemency unmerited by
these crimes, we grant him permission to commit suicide, and
hereby order that Ko Pao-hua shall supervise the execution of
these our commands.
“Prince Tuan, already cashiered, was the leader and
spokesman of the Imperial Clan, to whom was due the
declaration of war against foreigners; he trusted implicitly in
Boxer magic, and thus inexcusably brought about hostilities.
Duke Lan, who assisted Prince Chuang in drawing up the
proclamation which set a price on the head of every foreigner,
deserves also that he be stripped of all his dignities and titles.
But remembering that both these Princes are our near
kinsmen, we mitigate their sentence to exile to Turkestan,
where they will be kept in perpetual confinement. The
Governor of Shensi, Yü Hsien, already cashiered, believed in
the Boxers at the time when he held the Governorship of
Shantung; when he subsequently came to Peking, he sang
their praises at our Court, with the result that many Princes
and Ministers were led astray by his words. As Governor of
Shansi he had put to death many missionaries and native
converts, proving himself to be an utterly misguided and
bloodthirsty man. He was undoubtedly one of the prime
causes of all our troubles. We have already decreed his
banishment to Turkestan, and by this time he should already
have reached Kansu. Orders are now to be transmitted for his
immediate decapitation, which will be superintended by the
Provincial Treasurer.
“As to the late Grand Secretary, Kang Yi, he also believed
in the Boxers, and went so far as to set a price on the lives of
foreigners so that, had he lived, he too would have been
sentenced to death, but as matters stand, we order that he be
posthumously deprived of his rank and summarily cashiered.
“We have already cashiered Tung Fu-hsiang. While
permitted to retain his rank as a military official, he cannot
escape a certain share of responsibility for the siege of the
Legations, although his orders emanated from Princes and
Ministers of State; and because of his ignorance of foreign
affairs, slack discipline, and general stupidity, he certainly
deserves severe punishment. But we cannot overlook the
services he has rendered in the Kansu rebellion, and the
good name which he bears amongst our Chinese and
Mahomedan subjects in that province, so that, as a mark of
our favour and leniency, we merely remove him from his post.
[112]
“Ying Nien, Vice-President of the Censorate, was opposed

to the issue of the proclamation which offered rewards for
foreigners’ heads, and for this he deserves lenient treatment,
but he failed to insist strongly in his objections, and we are
therefore compelled to punish him. He is hereby sentenced to
be cashiered and imprisoned pending decapitation.[113]
“As regards the Grand Councillor Chao Shu-ch’iao, he had
never, to our knowledge, shown any hostility to foreigners,
and when we despatched him on a special mission to confer
with the Boxers, the report which he submitted on his return
showed no signs of sympathy with their proceedings.[114]
Nevertheless, he was undoubtedly careless, and we
therefore, acting in leniency, decree that he be cashiered and
imprisoned pending decapitation.[115]
“The Grand Secretary Hsü T’ung and Li Ping-heng, our
Assistant Commander-in-Chief, have both committed suicide,
but as their behaviour has been very severely criticised, we
order that they be deprived of their ranks; and all posthumous
honours granted to them are hereby cancelled.
“The Ministers of the friendly Powers can no longer fail to
recognise that the Boxer Rebellion was indeed the work of
these guilty officials, and that it was in no way due to any
action or wishes on the part of the Throne. In the punishment
of these offenders we have displayed no leniency, from which
all our subjects may learn how grave has been the recent
crisis.”
As the terms of this Decree still failed to satisfy the foreign

Ministers, especially as regards the sentences passed on Prince
Tuan and Duke Lan, another Decree, a week later, ordered that both
these Manchu leaders should be imprisoned pending decapitation, a
sentence which was eventually reduced to one of perpetual
banishment to Turkestan. Posthumous decapitation, a grievous
disgrace in the eyes of Chinese officials, was decreed as a further
punishment upon Kang Yi, while Chao Shu-ch’iao and Ying Nien
were ordered to commit suicide. Finally, the Grand Councillor Ch’i
Hsiu, and a son of the Grand Secretary Hsü T’ung (who had closely
followed in his father’s footsteps as the most violent opponent of
everything foreign), were sentenced to decapitation, and were duly
executed at Peking.
In compliance with the last demands of the Foreign Ministers, a
final Decree, the wording of which points clearly to reluctant action
under compulsion, restored the ranks and honours of the five
officials who had been executed for advising Her Majesty against the
Boxers. To revise this sentence without leaving them under some
imputation of blame would have involved most undesirable loss of
“face,” and the Decree therefore observes:—
“When we urged these officials, at a general audience of all

our Ministers, to state their views definitely, so that we might
judge fairly of the issues, they expressed themselves
hesitatingly, and our evil-disposed Princes and advisers were
thus able to take advantage of their apparent indecision. This
was the cause of their undoing. They were impeached on all
sides, and were eventually decapitated. We recall to mind the

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Part Two Fundamentals of Regression Analysis

Part Three Further Topics in Regression Analysis

Part Four Regression Analysis of Economic Time Series Data

Part Five The Econometric Theory of Regression Analysis

Part One Introduction and Review

1.2 Causal Effects and Idealized Experiments 5

1.3 Data: Sources and Types 7

Chapter 2 Review of Probability 14

2.2 Expected Values, Mean, and Variance 19

2.3 Two Random Variables 26

2.4 The Normal, Chi-Squared, Student t, and F Distributions 36

2.5 Random Sampling and the Distribution of the Sample Average 43

2.6 Large-Sample Approximations to Sampling Distributions 47

Chapter 3 Review of Statistics 65

3.2 Hypothesis Tests Concerning the Population Mean 71

3.3 Confidence Intervals for the Population Mean 80

3.6 Using the t-Statistic When the Sample Size Is Small 87

3.7 Scatterplots, the Sample Covariance, and the Sample

Part Two Fundamentals of Regression Analysis

4.3 Measures of Fit 121

4.4 The Least Squares Assumptions 124

4.6 Conclusion 133

Chapter 5 Regression with a Single Regressor: Hypothesis Tests and

5.2 Confidence Intervals for a Regression Coefficient 153

5.4 Heteroskedasticity and Homoskedasticity 157

5.5 The Theoretical Foundations of Ordinary Least Squares 163

5.6 Using the t-Statistic in Regression When the Sample Size

5.7 Conclusion 168

6.2 The Multiple Regression Model 189

6.3 The OLS Estimator in Multiple Regression 192

6.4 Measures of Fit in Multiple Regression 196

6.5 The Least Squares Assumptions in Multiple

6.6 The Distribution of the OLS Estimators in Multiple

6.8 Conclusion 206

7.2 Tests of Joint Hypotheses 222

7.3 Testing Single Restrictions Involving Multiple Coefficients 229

7.6 Analysis of the Test Score Data Set 238

Chapter 8 Nonlinear Regression Functions 256

8.2 Nonlinear Functions of a Single Independent Variable 266

8.4 Nonlinear Effects on Test Scores of the Student–Teacher Ratio 293

8.5 Conclusion 298

Chapter 9 Assessing Studies Based on Multiple Regression 315

9.2 Threats to Internal Validity of Multiple Regression Analysis 319

9.4 Example: Test Scores and Class Size 332

9.5 Conclusion 342

10.4 Regression with Time Fixed Effects 361

10.6 Drunk Driving Laws and Traffic Deaths 368

Chapter 11 Regression with a Binary Dependent Variable 385

11.2 Probit and Logit Regression 391

11.4 Application to the Boston HMDA Data 402

Chapter 12 Instrumental Variables Regression 424

12.2 The General IV Regression Model 435

12.3 Checking Instrument Validity 442

12.4 Application to the Demand for Cigarettes 448

12.6 Conclusion 458

Chapter 13 Experiments and Quasi-Experiments 475

13.2 Threats to Validity of Experiments 479

13.3 Experimental Estimates of the Effect of Class Size

13.4 Quasi-Experiments 493

13.5 Potential Problems with Quasi-Experiments 502

13.6 Experimental and Quasi-Experimental Estimates in Heterogeneous

Part Four Regression Analysis of Economic Time Series Data

Part Four Regression Analysis of Economic Time Series Data