Econometrics

Contents… Introduction to Econometrics

Methodology of Econometrics

Goals of Econometrics

Application

Assignment

Objectives of the ChapterTo understand econometrics

To know about the methodology of econometrics

To understand the relationship among econometrics, mathematical economics and statistics

To understand the goals of econometrics

Econometrics….????Evaluation of economic theories in numerical terms

Econometrics was introduced in 1926 by RagnarFrisch

It makes concrete certain theoretical economics laws by utilizing economics, mathematics and statistics

Econometrics may be defined as the social sciencein which the tools of economic theory,mathematics and statistics inference are applied ofthe analysis of economic phenomenon

- Arthur S. Goldberger

Methodology of EconometricsSpecification of the Model

Statistical Designs to obtain Data

Estimation of the Model

Verification of the Model

Application

Specification of the ModelRequirements

Selecting variables, specifying relationships based on economic theories (or hypothesis)

Possible ErrorsRelevant explanatory variable (s) not includedIrrelevant explanatory variable (s)Under-identifications

Statistical Designs to obtain Data

Estimation of the ModelRequirements

Estimators posses the properties such as Unbiased, Consistent, Efficient and Sufficient

Possible ErrorsEstimators do not posses the desired characteristics due to Autocorrelation, Hetroscedasticity andMulticollinearity in the sample

Verification of the ModelRequirements

Economic interpretation of the results Evaluation of economic theory or hypothesisRejection of economic theory if theory is not validated and then creation of new hypothesis to re-start

Possible ErrorsWrong and irrelevant tests evolved to verify the validity of the hypothesis

Application Requirements

The ultimate goal of econometrics is to obtain reliable predictions for the application to economic policy decision

Possible ErrorsBiased forecasts

Relationship……Econometrics and Mathematical Economics

Econometrics and Statistics

Goals of EconometricsJudge the validity of the economic theories

Supply the numerical estimates of the coefficients of the economic relationships which may be then used for sound economic policies

Forecast the future values of the economic magnitudes with certain degree of probability

Nature of the Econometrics Approach

There are four different stages which everyresearcher must take into account if nonsenseor ambiguous results are to be avoided….

Stage 1: Specification of the ModelThe dependent and explanatory variables to beincluded in the model

The a priori assumption about the size and thesign of the parameters of the model

The mathematical form of the model

Stage 2: Estimation of the ModelCollection of data on the variables included in themodel

Examination of the multicollinearity problem

Examination of the identification conditions if themodel involves more than single equation

Choice of appropriate econometrics techniquefor estimation of the model

Stage 3: Evaluation of the ModelEconomic ‘a priori’ criteria

Statistical criteria (First-order tests)

Econometric criteria (Second-order tests)

Stage 4: The Forecasting Power of the Model

Forecasting is closely related to policy choice and policy evaluation

Theoretical Econometrics It deals with the development of the appropriate methods for measuring economic relationships described by econometric models. These method may be:

Single-equation techniques which are applied to one relationship at a timeSimultaneous-equation techniques which are applied to all the relationships of the model simultaneously

Applied EconometricsIt describes the practical value of the econometrics research

It deals with the application of econometrics techniques developed in theoretical econometrics

Applied econometrics has great importance to our planners