INTRODUCTION TO ECONOMETRICS

Scope of Econometrics
M. Hashem Pesaran Lent Term

1 Objective of Econometrics
To quantify relationships between economic variables by means of statistical techniques
See Pesaran (1987), Econometrics, The New Palgrave, Volume 2, pp. 8-22, Macmillan.

2 Uses of Econometrics
In testing economic theories In forecasting economic variables of interest (for private and public use) In formulation and evaluation of economic policy In private and public sector decision making (consumption and investment decisions, conduct of monetary and scal policies) In risk management
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3 Practice of Econometrics
Management and processing of data sets Appropriate application of statistical techniques Use of computer software (knowing which software to use) Careful interpretation of the results

4 Different Stages of Econometric Analysis

Articulation of the decision problem (objectives and constraints) Compilation of the data (primary and secondary sources) Formulation of economic hypothesis (use of economic theory or a priori reasoning) Development of the econometric model Estimation and inference
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 Comparative analysis - sensitivity testing and analysis of counter factuals Interpretation Evaluation

5 Different Types of Data and Econometric Tools

Time Series (tick-by-tick, daily, weekly, monthly, yearly) Cross section (rms, households, regions, countries) Panel Data (time series over different cross section units)

6 Different Types of Measurements

Transaction data (prices, interest rates, exchange rates)
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 Aggregate data (GDP, employment, unemployment, price index, money, etc.) Survey data (qualitative, up, down, stay the same) as compiled by CBI (http://www.cbi.org.uk), CESifo (http://www.ifo.de), Chicago Conference Board (http://www.conferenceboard.org/economics) Data revisions - real time versus historical measurements

7 Data Transformations
Log transforms , namely yt = log(Yt) Rate of change (% rate of change), rate of Yt1 change = YtYt1 Log-difference transform Yt Yt1 yt yt1 = log(Yt) log(Yt1) Yt1 Ratios (saving rate, investment-output ratio)
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8 Data Sources
Ofcial publications (Internet sites, for example the UK Ofce of National Statistics (ONS), http://www.statistics.gov.uk ) International Organizations (IMF, OECD, World Bank, WTO, UN) Research Organizations, such as NBER, http://www.nber.org Commercial data sets (stock markets, FX, Fixed income and related series provide by JPMorgan, http://www.jpmorgan.com , Goldman Sachs, http://www.gs.com ) Field data (case studies by organizations and individual researchers)