Econometrics

Contents…
y Introduction to Econometrics
y Methodology of Econometrics
y Goals of Econometrics
y Application
y Assignment
Objectives of the Chapter
y To understand econometrics
y To know about the methodology of econometrics
y To understand the relationship among
econometrics, mathematical economics and
statistics
y To understand the goals of econometrics
Econometrics….????
y Evaluation of economic theories in numerical
terms
y Econometrics was introduced in 1926 by Ragnar
Frisch
y It makes concrete certain theoretical economics
laws by utilizing economics, mathematics and
statistics
Econometrics may be defined as the social science
in which the tools of economic theory,
mathematics and statistics inference are applied of
the analysis of economic phenomenon
- Arthur S. Goldberger
Methodology of Econometrics
y Specification of the Model
y Statistical Designs to obtain Data
y Estimation of the Model
y Verification of the Model
y Application
Specification of the Model
y Requirements
y Selecting variables, specifying relationships based on
economic theories (or hypothesis)
y Possible Errors
y Relevant explanatory variable (s) not included
y Irrelevant explanatory variable (s)
y Under-identifications
Statistical Designs to obtain Data
Estimation of the Model
y Requirements
y Estimators posses the properties such as Unbiased,
Consistent, Efficient and Sufficient
y Possible Errors
y Estimators do not posses the desired characteristics
due to Autocorrelation, Hetroscedasticity and
Multicollinearity in the sample
Verification of the Model
y Requirements
y Economic interpretation of the results
y Evaluation of economic theory or hypothesis
y Rejection of economic theory if theory is not validated
and then creation of new hypothesis to re-start
y Possible Errors
y Wrong and irrelevant tests evolved to verify the
validity of the hypothesis
Application
y Requirements
y The ultimate goal of econometrics is to obtain reliable
predictions for the application to economic policy
decision
y Possible Errors
y Biased forecasts
Relationship……
y Econometrics and Mathematical Economics
y Econometrics and Statistics
Goals of Econometrics
y Judge the validity of the economic theories
y Supply the numerical estimates of the coefficients
of the economic relationships which may be then
used for sound economic policies
y Forecast the future values of the economic
magnitudes with certain degree of probability
Nature of the Econometrics
Approach
There are four different stages which every
researcher must take into account if nonsense
or ambiguous results are to be avoided….
Stage 1: Specification of the Model
y The dependent and explanatory variables to be
included in the model
y The a priori assumption about the size and the
sign of the parameters of the model
y The mathematical form of the model
Stage 2: Estimation of the Model
y Collection of data on the variables included in the
model
y Examination of the multicollinearity problem
y Examination of the identification conditions if the
model involves more than single equation
y Choice of appropriate econometrics technique
for estimation of the model
Stage 3: Evaluation of the Model
y Economic ‘a priori’ criteria
y Statistical criteria (First-order tests)
y Econometric criteria (Second-order tests)
Stage 4: The Forecasting Power of
the Model
y Forecasting is closely related to policy choice and
policy evaluation
Theoretical Econometrics
y It deals with the development of the appropriate
methods for measuring economic relationships
described by econometric models. These method
may be:
y Single-equation techniques which are applied to one
relationship at a time
y Simultaneous-equation techniques which are applied
to all the relationships of the model simultaneously
Applied Econometrics
y It describes the practical value of the
econometrics research
y It deals with the application of econometrics
techniques developed in theoretical econometrics
y Applied econometrics has great importance to
our planners