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Published on April 18, 2008

Author: babakvz

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Topic 1 INTRODUCTION TO ECONOMETRICS:  Topic 1 INTRODUCTION TO ECONOMETRICS Slide2:  What is Econometrics? Why Econometrics? Why econometrics a core in economics course? What is Econometrics?:  What is Econometrics? Why Study Econometrics?:  Why Study Econometrics? The Objectives of Econometrics:  The Objectives of Econometrics Economic Model vs Econometric Model:  Economic Model vs Econometric Model An economic model is a set of assumptions that approximately describes the behaviour of an economy Example, Law of Demand An econometric model consists of the following: A set of behavioural equations derived from the economic model A statement of whether there are errors of observation in the observed variables A specification of the probability distribution of the “disturbances” What Constitutes a Test of an Economic Theory:  What Constitutes a Test of an Economic Theory To report the signs of the estimated coefficients in an econometric model the significance test of each variables / regression To confirm economic theories whether the estimated coefficients carried the expected sign the statistically significance of the variables The fitness of the model Methodology of Econometrics:  Methodology of Econometrics 1. Statement of theory or hypothesis 2. Specification of the mathematical model of the theory 3. Specification of the statistical, or econometric model 4. Obtaining the data Methodology of Econometrics (cont):  Methodology of Econometrics (cont) 5. Estimation of the parameters of the econometric model 6. Hypothesis Testing 7. Forecasting and prediction 8. Using the model for control or policy purpose 1. Statement of theory or hypothesis:  1. Statement of theory or hypothesis 2. Specification of the mathematical model of the theory:  2. Specification of the mathematical model of the theory C =  + Yd 0 <  < 1 where C = consumption Yd = income  = Marginal propensity to consume 3. Specification of the statistical, or econometric model:  3. Specification of the statistical, or econometric model C =  + Yd +  where , known as disturbance, error term or residual, is a random variable 4. Obtaining data:  4. Obtaining data Collect disposable income & consumption data. Should we collect time series data, cross sectional data or pooled data? 3 types of data: Time Series Data Cross Sectional Data Panel Data (Pooled Data) Time Series Data:  Time Series Data Time series data is a set of observations on the values that a variable takes at different times. Such data may be collected at regular time intervals (e.g., daily, weekly, monthly, quarterly, annually) Example: Consumption and disposable income for Malaysia from 1990-1992 Time Series Data:  Time Series Data Cross Sectional Data:  Cross Sectional Data Cross Sectional data are data collected on the same point in time. Example: Consumption and disposable income of different Asia countries in 1990 Cross Sectional Data:  Cross Sectional Data Panel Data:  Panel Data Panel data (Pooled data) are elements of both cross sectional and time series data. Example Consumption and disposable income among Asian Countries for the period of 1990-1992 Panel Data:  Panel Data 5. Estimation of the parameters of the econometric model:  5. Estimation of the parameters of the econometric model The numerical estimates of the parameters give empirical content MPC = 0.7 Is this model valid or correct? 6. Hypothesis Testing:  6. Hypothesis Testing Confirmation or refutation of economic theories on the basis of sample evidence C =  + Yd Autonomous consumption > 0 H0:  = 0 H1:  > 0 0 < MPC < 1 H0:  = 0 H1:  > 0 or H2:  < 1 7. Forecasting or Prediction:  7. Forecasting or Prediction If the chosen model does not refute the hypothesis or theory, we may use it to predict the value(s) of the dependent variable values of the explanatory variable was known 8. Use of the Model for Control or Policy Purposes:  8. Use of the Model for Control or Policy Purposes An estimated model may be used for control, or policy, purposes By appropriate fiscal and monetary policy mix, the government can manipulate the control variable Yd to produce the desired level of the target variable C Anatomy of Econometric Modeling:  Anatomy of Econometric Modeling

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