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Introduction ECO605 Lecture1

This document provides an introduction to econometrics. It explains that econometrics is needed to use observational data to test economic theories and evaluate the effects of policies, since experimental data is rare in economics. It discusses different types of data, including cross-sectional, panel, and time series data. It also emphasizes the challenge of establishing causality when estimating relationships between variables using observational data, given the potential for omitted variable bias.

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AmalAbdlFattah
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175 views

Introduction ECO605 Lecture1

This document provides an introduction to econometrics. It explains that econometrics is needed to use observational data to test economic theories and evaluate the effects of policies, since experimental data is rare in economics. It discusses different types of data, including cross-sectional, panel, and time series data. It also emphasizes the challenge of establishing causality when estimating relationships between variables using observational data, given the potential for omitted variable bias.

Uploaded by

AmalAbdlFattah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Welcome to Econometrics

WHAT IS ECONOMETRICS?

ECO 605 1
Why study Econometrics?
Rare in economics (and many other areas without labs!) to have
experimental data

Need to use nonexperimental, or observational, data to make inferences

Important to be able to apply economic theory to real world data

ECO 605 2
Why study Econometrics?
An empirical analysis uses data to test a theory or to estimate a
relationship

A formal economic model can be tested

Theory may be ambiguous as to the effect of some policy change – can


use econometrics to evaluate the program

ECO 605 3
Types of Data – Cross
Sectional
Cross-sectional data is a random sample

Each observation is a new individual, firm, etc. with information at a


point in time

If the data is not a random sample, we have a sample-selection problem

ECO 605 4
Types of Data – Panel
Can pool random cross sections and treat similar to a normal cross
section. Will just need to account for time differences.

Can follow the same random individual observations over time – known
as panel data or longitudinal data

ECO 605 5
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, different problems to consider

Trends and seasonality will be important

ECO 605 6
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, then the estimated
ceteris paribus effect can often be considered to be causal
Can be difficult to establish causality

ECO 605 7
Example: Returns to Education
A model of human capital investment implies getting
more education should lead to higher earnings
In the simplest case, this implies an equation like

Earnings =  0 + 1education + u

ECO 605 8
Example: (continued)
The estimate of 1, is the return to education, but can it be considered
causal?
While the error term, u, includes other factors affecting earnings, want to
control for as much as possible
Some things are still unobserved, which can be problematic

ECO 605 9

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