—= 3 Econometrics Theory a lications i a Views EL Prentice Hall fddnioca sate SapBOTT FINANCIAL TIMES _www.pearsoned.co.uk/vogelvangof ad ai ries a er eePearson Education Limited Edinburgh Gate Harlow Essex CM20 25E England and Associated Companies throughout the world Visit us on the World Wide Web at: ‘www pearsoned.co.uk First published 2005 © Pearson Education Limited 2005 ‘The right of Ben Vogelvang to be identified as author ofthis work has been asserted by him in accordance withthe Copyright, Designs and Patents Act 1988, All rights reserved. No part of this publication may be reproduced, stored ina retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, ‘without either the prior written permission ofthe publisher ora licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London WIT 4LP. Al trademarks used herein are the property oftheir respective owners. The use of any trademark in this {ext does not vest inthe author or publisher any trademark ownership rights in sueh trademarks, nor does the use of such trademarks imply any afiition with or endorsement of this book by such owners ISBN-10: 0-273-68374-8 ISBN-13: 978.0-273-68374.2 British Library Cataloguing-n-Publiction Data ‘catalogue record for this book s available from the British Library Library of Congress Cataloging in-Publication Data ‘catalogue record fo this book is available fom the Library of Congress 10987654 10.09 08 07 06 ‘Typeset in 10/12 pt. Times by 59 Printed and bound in Malaysia, ‘The publisher's policy isto use paper manufactured from sustainable forests.Dedicated to my fine small family: Yvonne, Astrid and Valentijn, MichielPart | Chapter 1 Chapter 2 Preface Acknowledgements Preparatory Work Introduction to Part | Basic Concepts of Econometric Models 1.1 Scientific quantitative economic research 1.2 Economic and econometric models 1.3 Economic data 1.4 Variables of an economic model 1.5 Structural and reduced-form equations 1.6 Parameters and elasticities 1.7 Stochastic models. 1.8 Applied quantitative economic research Description of the Data Sets and Introduction to the Cases 2.1 Introduction 2.2 Data set 1: commodity prices 2.3 Data set 2: macroeconomic data 2.4 Data set 3: oil market-related data xv RR Fanaa n 12 14 15 19 21 22viii Contents Chapter 3. Part Il Chapter 4 Chapter 5 Chapter 6 2.5 Data set 4: money market 2.6 Data set 5: cross-section data Basic Concepts of EViews and Starting the Research Project 3.1 Introduction 3.2 The creation of a workfile in EViews 3.3 Viewing variables and some procedures 3.4 Some basic calculations in EViews 3.5 Case 1: the data analysis, The Reduced-Form Model Introduction to Part II Description of the Reduced-Form Model 4.1 Introduction 4.2 The assumptions of the classical regression model 4.3 The ordinary least squares (OLS) estimator 4.4 Relationship between disturbances and residuals 4.5 Estimation of the variance of the disturbance term 4.6 Desirable statistical properties of estimators 4,7 The distribution and some properties of the OLS estimator 4.8 Maximum likelihood estimation 4.9 Regression analysis with EViews Testing the Deterministic Assumptions 5.1 Introduction 5.2 Relationships among variables of the linear model 5.3 The coefficient of determination 5.4 Survey of some useful distributions and test principles 5.5 Distribution of the residual variance estimator 5.6 Interval estimates and the t-test to test restrictions on parameters 5.7 The Wald F-test to test restrictions on parameters 5.8 Alternative expressions for the Wald F-test and the LM-test Testing the Stochastic Assumptions and Model Stability 6.1 Introduction 6.2 A normality test 6.3 Tests for residual autocorrelation 6.4 Tests for heteroskedasticity 6.5 Checking the parameter stability 6.6 Model estimation and presentation of estimation results 6.7 Case 2: an econometric model for time-series data 23 24 25 32 41 47 49 54 Ss. 52 55 61 63 67 19 80 85 85 89 92 95 96 103 108 113 113 1S 7 125 132 135 137Contents Chapter 7 Part Ill Chapter 8 Chapter 9 Chapter 10 Chapter 11 A Collection of Topics Around the Linear Model 7.1 Introduction 7.2 Specification errors 73 Prediction 7.4 Multicollinearity 7.5 Artificial explanatory variables 7.6 Case 3: exercises with the estimated model Specific Structural Models Introduction to Part Ill Estimation with More General Disturbance-Term Assumptions 8.1 Introduction 8.2 The generalised least squares (GLS) estimator in theory 8.3 The SUR model 8.4 Case 4: a SUR model for the macroeconomic data 8.5 Autocorrelated disturbances 8.6 Heteroskedastic disturbances 8.7 Case 5: heteroskedastic disturbances 8.8 Introduction to ARCH and GARCH models Models with Endogenous Explanatory Variables 9.1 Introduction 9.2 The instrumental-variable (IV) estimator 9.3 The two-stage least squares (2SLS) estimator 9.4 IV and 2SLS estimation in EViews 9.5. Case 6: consistent estimation of structural models Simultaneous Equation Models 10.1 Introduetion 10.2 Mathematical notation of the SEM. 10.3 Identification 10.4 Case 7: identification of the equations of a SEM 10.5. Estimation methods 10.6 Case 8: simultaneous estimation of a macroeconomic model 10.7 Two specific multiple-equation models Qualitative Dependent Variables 11.1 Introduction 11.2 The linear probability model 11.3 Probit and logit models 11.4 Estimation of binary dependent variable models with EViews 11.5 Case 9: modelling a qualitative dependent variable 139 139 139 143 155 159 166 167 168 171 m1 172 174 178 179 182 191 192 199 201 204 210 213 215 215 216 221 226 226 229 230 235 235 236 239 242 247Contents Part IV Chapter 12 Chapter 13 Chapter 14 Time-series Models Introduction to Part IV Dynamic Models, Unit Roots and Cointegration 12.1 Introduction 12.2 Lag operators, notation and examples 12.3 Long-run effects of short-run dynamic models 12.4 Error-correction models 12.5 Trends and unit-root tests 12.6 Relationships between non-stationary variables 12.7 Case 10: cointegration analysis Distributed Lag Models 13.1 Introduction 13.2 A finite distributed lag model 13.3 Infinite distributed lags 13.4 Models with a lagged dependent variable Univariate Time-Series Models 14.1 Introduction 14.2 Time-series models and some properties 14.3 Box—Jenkins procedures 14.4 The autocorrelation function (ACF) 14.5 The partial autocorrelation function (PACF) 14.6 Examples of theoretical ACFs and PACFs for some TS models 14.7 The Box-Jenkins approach in practice 14.8 Case 11: Box-Jenkins procedures References Index 249 250 253 253 254 259 278 292 303 305 305 306 311 316 321 321 324 327 328 330, 333 340, 352, 353 357About this first course in econometrics Economists will regularly be confronted with results of quantitative economic research. ‘Therefore they should have knowledge about quantitative economic methods: they should know how models arise, what the underlying assumptions are, and in what way estimates of parameters or other economic quantities are computed. In this book, ‘a first course in econometrics’ is presented that meets all these requirements. In this course, econometric theory is combined with econometric practice by showing and exercising its use with software package EViews. Basic knowledge of econometric theory is necessary to understand what may (or may not) be done in applied quantitative economic research, It is not imperative that students can prove all the underlying statistical theorems that are necessary to derive estimators and statistics. In other words, the aim of this econometrics course is to make students aware of the underlying statistical assumptions of the methods they want to use or that others have used. It is very important to recognise which assumptions have been made by an author, whether these assumptions have been tested in a correct way, etc. In this book, many exact derivations are given, but in some cases itis sufficient just to explain what is going on in that particular situation, References to the econometrics literature, for more detailed information. ‘on any subject, are given in throughout the text and are listed at the end of this book. Econometrics is not mathematics or statistics only, but econometrics clearly belongs to the economic discipline; this starting-point is obviously recognisable in the text. With this approach to teaching econometrics, students will get a clear understanding of econometric practice and the underlying econometric theory. The integration of econometric theory, its application and the use of econometric software distinguishes this book from existing econometric texts.