Lecture 1: What is Econometrics
Zheng Tian
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Understanding Econometrics: Science, Art, and Economic Research, Study notes of Art
This lecture introduces Econometrics, a multidisciplinary field that combines economics, mathematics, and statistics to analyze economic data. the definition of Econometrics, its role as a science and art, and the process of econometric research. Economic questions, such as the impact of reducing class size on elementary school education, are also discussed, along with the use of randomized controlled experiments and various data types.
What you will learn
- What is the definition of Econometrics?
- What are the differences between cross-sectional, time series, and panel data?
- How can econometric methods be used to deal with causality using observational data?
- What are the advantages and disadvantages of randomized controlled experiments?
- How does Econometrics combine economics, mathematics, and statistics?
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Lecture 1: What is Econometrics
Zheng Tian
Outline
1 What is Econometrics
2 Economic Questions We Examine
3 Causal Effects and Idealized Experiments
4 Data Sources and Types
What is Econometrics
What do you think of Econometrics?
Economics?
Mathematics?
Statistics?
What is Econometrics
Definition of Econometrics
Stock and Watson (2015) define Econometrics as
At a broad level, econometrics is the science and art of using
economic theory and statistical techniques to analyze economic
data.
What is Econometrics Science or art?
Art
Econometrics is an art because
the data are usually incomplete and unobserved to validate a
hypothesis
we need to use human creativity to reach a balance between scientific
rigor and realistic approximation.
What is Econometrics Science or art?
A quote from Hansen
Econometrics is alchemy since econometricians can create nearly
any result desired, but it is also science because econometricians
also know how to reject and avoid spurious models. – Hansen
Economic Questions We Examine
Question #1: Does reducing class size improve elementary school education?
1 What is Econometrics
2 Economic Questions We Examine
3 Causal Effects and Idealized Experiments
4 Data Sources and Types
Economic Questions We Examine
Question #1: Does reducing class size improve elementary school education?
The argument for small class size goes like this
Small classes get more teacher-student interaction, fewer disruptions, and
higher grades in test.
Economic Questions We Examine
Question #1: Does reducing class size improve elementary school education?
The research design
Qualitative research design A field investigation
Quantitative research design Randomized controlled experiments (RCE, or
randomized controlled trial, RCT)
Economic Questions We Examine
Question #1: Does reducing class size improve elementary school education?
The sample and data
Draw samples and collect data from 420 California school districts in
Cross-sectional data. Each row represents a distinct unit of
observation. All observations are collected in a single year.
Figure: A screen shot of the dataset the California school districts in 1999
Economic Questions We Examine Three other questions
The three other questions
Question 1 Does reducing class size improve elementary school
education?
Question 2 Is there racial discrimination in the market for home loan?
Question 3 How much do cigarette taxes reduce smoking?
Question 4 What will the rate of inflation be next year?
Economic Questions We Examine Three other questions
A summary of data types
Table: Data types and econometric methods for all four questions
Questions Data types Econometric methods
#1 experimental, cross-sectional multiple regression
#2 observational, cross-sectional multiple regression with binary de-
pendent variable
#3 observational, panel data Panel data regression model
#4 observational, time series multiple regression with lagged de-
pendent variable
Causal Effects and Idealized Experiments Randomized controlled experiment
Randomized controlled experiments (or trials, RCTs
thereafter)
Clinical trials to test the effectiveness of medical intervention.
All participants are randomly assigned into two groups.
The control group receives no treatment (or placebo)
The treatment group receives the treatment.
After a follow-up period, compare the two groups.
Causal Effects and Idealized Experiments Randomized controlled experiment