Applied Econometrics

Master of Applied Economics ProgramUniversitas Padjadjaran

Today

• First things first– Instructors– References– Prerequisites– Grading– Computer software issues

• An overview of econometrics

FIRST THINGS FIRST!Applied Econometrics

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

OVERVIEWEconometrics

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 econ

omic-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

13

14

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.”

18

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)

19

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

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

23

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

24

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

30

Obtaining Data

• Primary Data Collection– Used mostly in applied microeconometrics (cross-

section 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

31

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 country’s export performance, we just need to get the data from the country’s statistical bureau or from other organisations.

Macro vs Micro Data

MACRO DATA• General Information

– Aggregate

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

• Usually available in hard copy

• Number of observation is small

MICRO DATA• Specific information

– Individual level – Household level– Firm level

• Example:– Individual characteristics such as

gender, age, education– Firm characteristics such as

owner, labor, cost etc

• 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)

35

Methodology of Econometrics1. Statement of theory or hypothesis2. Specification of the mathematical model of the

theory3. Specification of the econometric model4. Obtaining the data5. Estimation of the parameters of the econometric

model6. Hypothesis testing7. Forecasting or prediction8. Using the model for policy purposes

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

38

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

Estimated econometric model

Econometric estimation - estimator

• Biasedness• Efficiency• Consistency

Next week

• STATA has to be installed in your computer