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Applied Econometrics

February 23, 2005

Jin-Tan Liu
Department of Economics,
National Taiwan University and NBER
Telephone 02-23519641 ext. 520

Kennedy, Peter (2003), Chapter 21: Applied Econometrics,
A Guide to Econometrics, Blackwell Publishing.

1. Economic Theory, Interesting Topics:
Wooldridge, Jeffrey M. (2003), Introductory Econometrics:
A Modern Approach, South-Western. Chapter 19, Carrying
out an Empirical Project.
Policy Evaluation: Natural Experiment
NBER web site:
Taiwan Study:
1968 Taiwan 9-years education extension program
1995 Taiwan National Health Insurance
Happiness Research in Economics


Plug and Vijberberg (2003), Schooling, Family Background,

and Adoption: Is It Nature or Is it Nurture?, JPE, 111(3), 611641.

Plug (2004), Estimating the Effect of Mothers Schooling on

Childrens Schooling Using a Sample of Adoptees, AER,
94(1), 358-368.

Persico, Postiewaite, and Silverman (2004), The Effect of

Adolescent Experience on Labor Market Outcomes: The Case
of Height, JPE, 112(5), 1019-1053.

2. Data:
Econometrics is much easier without data. (Verbeek,

At least 80 percent of the material in most of the existing

textbooks in econometrics focuses purely on econometric
techniques. By contrast, practicing econometricians typical
spend 20 percent or less of their time and effort on
econometric techniques per se; the remainder is spent on
other aspects of the study, particularly on the construction
of a relevant econometric model and the development of
appropriate data before estimation and the interpretation of
results after estimation. (Intriligator, Bodkin, and Hsiao,

2. Data:
Griliches, Zvi (1986), Economic Data Issues, Handbook
of Econometrics, Volume III, Elsevier Science Publishers.

Deaton, Angus (1995), Data and Econometric Tools for

Development Analysis, Handbook of Development
Economics, Volume III, Elsevier Science Publishers.

Deaton, Angus (1997), Econometric Issues for Survey

Data, The Analysis of Household Surveys: A Microeconometric Approach to Development Policy, Johns
Hopkins University Press.

2. Data:
Hamermesh, Daniel S. (1999), LEEping into the future of
Labor Economics: the Research Potential of Linking
Employer and Employee Data, Labor Economics, 6, 25-41.
Why bother with linking employer-employee data?
New directions for research and policy.

Hamermesh, Daniel S. (2002), International Labor

Economics, NBER working paper 8757.
NBER, Journal of Economic Data. (A forthcoming Journal)

3. Econometric Method:
the current disconnect between economics and
econometrics in the past two decades, the gap between
econometric theory and empirical practice has grown,
command of statistical methods is only a part and
sometimes a very small part of what is required to do firstclass empirical work, (Heckman, 2001).

it is not what you know about something which is

important but rather how you use it. (Pagan, 1999, p. 374).

3. Econometric Method:
Hamermesh, Daniel S. (1999), The Art of Labormetrics,
NBER working paper 6927.

Jones, Andrew M. (2000), Health Econometrics,

Handbook of Health Economics, Volume 1, Elsevier
Science Publishers.

The Ten Commandments

of Applied econometrics
Rule 1: Use common sense and economic theory

The role of theory extends beyond the development of

the specification; it is crucial to the interpretation of the
results and to identification of predictions from the
empirical results that should be test.


The Ten Commandments

of Applied econometrics
Rule 2: Avoid type III errors

A type III error occurs when a researcher produces the

right answer to the wrong question.


The Ten Commandments

of Applied econometrics
Rule 3: Know the context

Do not try to model without understanding the nonstatistical aspects of the real-life system you are trying to
subject to statistical analysis. (Belsley and Welch, 1988).

History, institutions, operating constraints, measurement

peculiarities, cultural customs.

How were the data gathered?


The Ten Commandments

of Applied econometrics
Rule 4: Inspect the data

Economists are accused of never looking at their data.

Economists are unique among social scientists in that they are

trained only to analyze, not to collect data.

Data generation is a dirty, time-consuming, expensive and nonglorious job.

Environmental Economics: Benefit Estimation, Contingent

Valuation Method.

Summary Statistics, Graphs, and Data Cleaning (any observations

impossible, unrealistic or suspicious?)

The Ten Commandments

of Applied econometrics
Rule 5: Keep it sensibly simple

Econometricians employ the latest, most sophisticated

econometric techniques, often because such techniques are
novel and available, not because they are appropriate.

Think first why you are doing before attacking the problem
with all the technical arsenal you have and churning out a
paper that may be mathematically imposing but of limited
practical use. (Maddala, 1999).


The Ten Commandments

of Applied econometrics
Rule 6: Test the estimation

to check that the results make sense.

The signs of coefficients as expected? Important variables

statistically significant? Are coefficient magnitudes
reasonable? Are the results consistent with theory?


The Ten Commandments

of Applied econometrics
Rule 7: Be prepared to compromise

Econometric theory courses students are taught standard

solutions to standard problem, but in practice there are no
standard problems, only standard solutions.


The Ten Commandments

of Applied econometrics
Rule 9: Do not confuse statistical significance with
meaningful magnitude

Very large samples can give rise to estimated coefficients

with very small standard errors.

Look at the magnitude of coefficient estimates as well as

their significance.


The Ten Commandments

of Applied econometrics
Rule 10: Report a sensitivity analysis

Are the results sensitive to the sample period, the

functional form, the set of explanatory variables, or
measurement of proxies for the variables?

Are robust estimation results markedly different?