What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Introduction to EconometricsEconomic Questions and Data

Carlos A. Mendez Guerra

Graduate School of International DevelopmentNagoya University

August 6, 2010

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Outline

1 What is Econometrics?

2 The LAB of Social Sciences

3 The Methodology of Econometrics

4 The Structure of the Data

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Outline

1 What is Econometrics?

2 The LAB of Social Sciences

3 The Methodology of Econometrics

4 The Structure of the Data

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Outline

1 What is Econometrics?

2 The LAB of Social Sciences

3 The Methodology of Econometrics

4 The Structure of the Data

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Outline

1 What is Econometrics?

2 The LAB of Social Sciences

3 The Methodology of Econometrics

4 The Structure of the Data

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Economic Questions

Relationships and Magnitudes

Economics suggests relationships, but not quantitative magnitudesof causal effects.

What is the quantitative effect of reducing class size onstudent achievement?

How does another year of education change earnings?

What is the price elasticity of cigarettes?

What is the effect on output growth of a 1 percentage pointincrease in inflation?

What is the effect on housing prices of environmentalimprovements?

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics

Definition

The application of statistical and mathematical methods to theanalysis of economic data, with the purpose of giving empiricalcontent to economic theories (verifying them or refuting them).

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Causal Effects and Idealized Experiments

Ideally, we would like an experiment

What would be an experiment to estimate the effect of classsize on standardized test scores?

But almost always we only have observational(nonexperimental) data.

Returns to Education, Cigarette Prices, Monetary policy

There are difficulties arising from usingobservational to estimate causal effects

1 Confounding effects (omitted factors)

2 Simultaneous causality

3 Correlation does not imply Causation (Can be difficult tostablish causality)

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Econometrics in 8 Steps

1 Statement of theory or hypothesis (RESEARCH QUESTION).

2 Specification of the MATHEMATICAL MODEL of the theory

3 Specification of the STATISTICAL MODEL (EconometricModel)

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 control or policy purposes.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Cross Sectional, Time Series and Panel Data

1 Cross Section: Multiple entities observed at a Single timeperiod.

2 Time Series: Single entity observed at Multiple time periods.

3 Longitudinal Data: Multiple entities where each entity isobserved at Multiple time periods.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Cross Sectional, Time Series and Panel Data

1 Cross Section: Multiple entities observed at a Single timeperiod.

2 Time Series: Single entity observed at Multiple time periods.

3 Longitudinal Data: Multiple entities where each entity isobserved at Multiple time periods.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Cross Sectional, Time Series and Panel Data

1 Cross Section: Multiple entities observed at a Single timeperiod.

2 Time Series: Single entity observed at Multiple time periods.

3 Longitudinal Data: Multiple entities where each entity isobserved at Multiple time periods.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

Cross Sectional, Time Series and Panel Data

1 Cross Section: Multiple entities observed at a Single timeperiod.

2 Time Series: Single entity observed at Multiple time periods.

3 Longitudinal Data: Multiple entities where each entity isobserved at Multiple time periods.

Carlos Mendez (GSID) Econometrics: Lecture 1

What is Econometrics?The LAB of Social Sciences

The Methodology of EconometricsThe Structure of the Data

THANK YOU!

Carlos Mendez (GSID) Econometrics: Lecture 1