Applied Econometrics

Master of Applied Economics Program Universitas Padjadjaran

Today
First things first
Instructors References Prerequisites Grading Computer software issues

An overview of econometrics

Applied Econometrics

FIRST THINGS FIRST!

Instructors
R.M. Purnagunawan
muhamad.purnagunawan@fe.unpad.ac.id

Ekki Syamsulhakim
ekki.syamsulhakim@fe.unpad.ac.id https://sites.google.com/a/fe.unpad.ac.id/ekki/

Main Text
Wooldridge, J., Introductory Econometrics: A Modern Approach, 2009

Good books
Additional texts:
Wooldridge, J., Analysis of Cross-Section & Panel Data, 2002 Green, William H., Econometrics Analysis, 5th Edition, McGraw Hill International Edition Koop, Gary, Analysis of Economic Data, 2000 Other text (books and papers) TBA by lecturers

Prerequisites
Applied econometrics or basic econometrics?
Different background of students

Normally students taking econometrics subjects must have taken

Mathematical economics Statistics Microeconomics Macroeconomics
http://www.utexas.edu/cola/depts /economics/

Grading
Assignments 20 % Mid term exam 35% Final Exam 45%

Computer software issues

We will use STATA (version 11 or 12) more extensively than EVIEWS STATA is powerful in managing large dataset

Econometrics

OVERVIEW

Why econometrics prevails?

A need in empirical evidence of economic theory Increasing use of mathematical methods in economics Advancement in computers and computing The lowering price (increasing supply) of economic-related data

Theoretical vs empirical economics

Do economic theories sufficient in explaining economic phenomenon? Do we have an existing economic theory that can explain the relationship between economic variables? Stylised fact

Example

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Computing and computers

Free Economic Data

The ability to take data - to be able to understand it, to process it, to extract value from it, to visualize it, to communicate it, is going to be a hugely important skill in the next decades. Because now we really do have essentially free and ubiquitous data. So the complimentary scarce factor is the ability to understand that data and extract value from it.

What is Econometrics?
The application of mathematical statistics to economic data, to lend empirical support to the models constructed by mathematical economics, and to obtain numerical results (G.S Madalla)

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Why are you studying econometrics?

In order to be able to test economic theories (empirical verification) In order to enhance economic theories based on empirical study

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Causality and correlation

Correlation does not imply causality
2 variables may be closely related (high correlation coefficient) Does it mean that the change in one of the variables causes the change in the other?

Causality and correlation

Causality is probably the main reason why we need econometrics Issues in establishing causality:
Requires economic theory & econometric assumptions to be satisified Feedback/reverse causality

Ceteris paribus for some exogenous omitted variables

Quantitative Analysis in Economics

Econometrics is one of many tools in conducting applied quantitative economic research Other tools may be:
Applied statistics Computable General Equilibrium Modelling etc

The structure of economic data

Cross Sectional Data
consists of a sample of individuals, households, firms, cities, states, countries, or a variety of other units, taken at a given point in time

Time Series Data

Consists of observations on a variable or several variables over time

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The structure of economic data

Pooled Cross Section Data
combination of two or more cross-sectional data

Panel or Longitudinal Data

A panel data set consists of a time series for each cross-sectional member in the data set

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Obtaining Data
Primary Data Collection
Used mostly in applied microeconometrics (crosssection type data) Uses of surveys, questionnaires, interviews Example: to analyse the effectiveness of econometrics lecture at Unpad, we need to collect data of the students

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Obtaining Data
Secondary Data Collection
Used in either applied microeconometrics or macroeconometrics (mostly time-series type data) Can be bought from the sources Example: to analyse the effect of exchange rate fluctuation on a countrys export performance, we just need to get the data from the countrys statistical bureau or from other organisations.

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Macro vs Micro Data

MACRO DATA
General Information
Aggregate

MICRO DATA
Specific information
Individual level Household level Firm level

Example:
GDP of a country GDRP of a region Inflation in a country Trade of countries

Example:
Individual characteristics such as gender, age, education Firm characteristics such as owner, labor, cost etc

Usually available in hard copy Number of observation is small

Available in raw data Number of observation is large

Indonesian Macro Data

Statistik Ekonomi Keuangan Indonesia Worldbank data on Indonesia etc

Indonesian Micro Data

SUSENAS (Survey Sosial Ekonomi Nasional) SAKERNAS (Survey Angkatan Kerja Nasional) SURVEY INDUSTRI MANUFAKTUR INDONESIAN FAMILY LIFE SURVEY (IFLS) INDONESIAN DEMOGRAPHIC AND HEALTH SURVEY (IDHS)

Methodology of Econometrics
1. Statement of theory or hypothesis 2. Specification of the mathematical model of the theory 3. Specification of the econometric model 4. Obtaining the data 5. Estimation of the parameters of the econometric model 6. Hypothesis testing 7. Forecasting or prediction 8. Using the model for policy purposes
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Example : modeling
We want to know the relationship between Subjective Well Being and Income Even though what we are doing is probably a stylised fact,

we need to have an economic theory (or mixed with

psychology theory?) to explain the relationship
Also to find other variables affecting SWB

Model and Variables

= ( , , ) = (, , , , , , , , , , ) We will use Linear Probability Model and Probit model to estimate the equation

The goal of econometric analysis

The goal of any econometric analysis is to estimate the parameters in the (economic) model and to test hypotheses about this parameter

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Estimated econometric model

Econometric estimation - estimator

Biasedness Efficiency Consistency

Next week
STATA has to be installed in your computer