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Why study Econometrics? An empirical analysis uses data to test a theory or to estimate a relationship A formal model can be tested Theory may be ambiguous as to the effect of some policy change – can use econometrics to evaluate the program 2 .
Steps in Empirical Analysis Careful formulation of the question of interest Economic Model or Informal Economic Intuition or Reasoning Turn an Economic Model into an Econometric Model State Hypothesis of Interest Data Estimation Testing of Hypothesis 3 .
firm. with information at a point in time If the data is not a random sample. etc.Types of Data – Cross Sectional Cross-sectional data is a random sample Each observation is a new individual. we have a sample-selection problem 4 .
Types of Data – Cross Sectional 5 .
Types of Data – Cross Sectional 6 .
different problems to consider Trends and seasonality will be important 7 .Types of Data – Time Series Time series data has a separate observation for each time period – e.g. stock prices Since not a random sample.
Types of Data – Time Series 8 .
Can follow the same random individual observations over time – known as panel data 9 . Will just need to account for time differences.Types of Data – Pooled Crosssections and Panel Can pool random cross sections and treat similar to a normal cross section – known as pooled cross-sections data.
Types of Data – Pooled Crosssections 10 .
Types of Data – Panel 11 .
then the estimated ceteris paribus effect can often be considered to be causal Can be difficult to establish causality 12 .The Question of Causality Simply establishing a relationship between variables is rarely sufficient Want to the effect to be considered causal If we’ve truly controlled for enough other variables.
this implies an equation like Earnings 0 1education u 13 .Example: Returns to Education A model of human capital investment implies getting more education should lead to higher earnings In the simplest case.
but can it be considered causal? While the error term.Example: (continued) The estimate of 1. u. which can be problematic 14 . includes other factors affecting earnings. want to control for as much as possible Some things are still unobserved. is the return to education.