Introduction to Applied Econometrics

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Introduction to Applied Econometrics

• Instructor Zhigang Li

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Objectives of this Course

• Help you evaluate the empirical work of others.
• Help you develop your own empirical models,
  estimate them, and interpret the estimates.

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What is Applied Econometrics about?

• Clearly state an economic question, e.g.
• to obtain some economic quantity (e.g. what is
  the inflation rate?)
• to describe an economic relationship (e.g. what
  is the relationship between land supply and
  housing prices?)
• Collect well-behaved data
• Estimate a sensible model
• Reasonably interpret model estimates

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Steps of an Empirical Project

• Goal
• Answering some economic question
• Strategy
• Whether you need to identify a causal
  relationship?
• How to identify a causal relationship?
• Tatics
• Data cleaning, functional forms, robustness
  tests, interpretation.

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Some examplesWhat can viruses cause?

• The George Bush Virus
• Causes your computer to keep looking for viruses
  of mass destruction.
• The Arnold Schwarzenegger Virus
• Terminates some files, then leaves, but will be
  back.
• The Lewinsky Virus
• Sucks all the memory out of your computer, then
  e-mails everyone about what it did.

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Why are we interested in the causal relationship?

• We care about the future.
• What we know is
• The past
• Economic theory
• We may use what has happened in the past to
  estimate the causal relationship suggested by
  theory so as to apply it in the future.
• Example Infrastructure investment and employment

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Limitation of applied econometrics

• High quality data
• Opportunities to identify causal relationships
  (if this is the objective)
• Lab experiment rarely possible
• Field experiment costly
• Natural experiments luck is necessary.

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Notes

• You may meet a lot of symbols (in empirical
  models), but this is not a math course.
• This is not a basic statistics course
• This is not a econometric theory course (no
  matrix operation or proofs)