Introductory Econometrics

A Practical Approach

Hamid Seddighi

• Publisher: Routledge
• Year: 2013
• Print ISBN: 9780415566889
• eBook ISBN: 9781136586095
• Edition: 2
• Topic: Commerce
• Subtopic: Commerce Général

This book constitutes the first serious attempt to explain the basics of econometrics and its applications in the clearest and simplest manner possible. Recognising the fact that a good level of mathematics is no longer a necessary prerequisite for economics/financial economics undergraduate and postgraduate programmes, it introduces this key subdivision of economics to an audience who might otherwise have been deterred by its complex nature.

Unit 1

Single-Equation Regression Models

• This unit introduces the reader to the traditional approach to econometric analysis, focusing on the formulation, estimation and evaluation of single-equation regression models.
• The unit explains the traditional specific to general (SG) methodology of econometric analysis and demonstrates this methodology in a step by step fashion via a number of applied econometric examples.
• The emphasis throughout this unit is on understanding the key concepts and issues and on applying key ideas to modelling and empirically evaluating economic models.
• Chapters 1 and 2 explain the process of economic modelling and modification of the economic models into econometric models for the purpose of empirical analysis.
• Chapter 3 explains the concept of estimators, sampling distributions, properties of ‘good’ estimators, and the OLS estimators and their properties.
• Chapter 4 explains the criteria for evaluation of the regression results, focusing on hypotheses testing and tests of significance.
• Chapter 5 explains the diagnostic testing procedures used in practice to test and to detect breakdown of the standard assumptions, including several tests for autocorrelation and heteroscedasticity. Unlike conventional texts, which typically devote several chapters to these issues, and, therefore, give the impression that each of the breakdowns occurs independently of other problems, this chapter follows what typically happens in practice, explaining all key problems together under one roof to re-emphasise the methodological problems of the traditional approach.
• Chapter 6 explains the phenomenon of spurious regression, frequently encountered within the framework of the traditional (SG) methodology. It discusses how this methodology deals with this problem in practice and explains the modern approach to dealing with this problem.
• Chapter 7 provides detailed coverage of the traditional approach to converting static econometric models to dynamic econometric models, explaining the distributed lag and the autoregressive dynamic models.
• This unit shows key aspects of the traditional methodology to single-equation econometric analysis, including modelling, estimation, evaluation and spurious regression phenomenon, providing a sound foundation for the modern approach to time series econometric analysis, to be discussed in Unit 4.
• This unit is suitable for an introductory course/module in econometrics to be delivered over one semester.
• To better understand key elements of this unit, students are encouraged to model various economic variables, making use of the review questions at the end of each chapter, collect relevant data (for example, from various online sources), and use an appropriate regression package to estimate, evaluate and analyse single-equation regression models.

1 Economic Theory and Economic Modelling in Practice

Introduction

Econometrics is a branch of economics dealing with the empirical evaluation of abstract economic theories and models. The principle aim of econometrics is to check the validity of the economic models against data, and to provide empirical content to economic theories and models. The key component of an econometric analysis is therefore an economic theory specifically in the form of an economic model suitable for empirical evaluation. This chapter provides an introductory discussion of the methods of economic modelling and econometric analysis. To this end, a number of simple economic models are developed step by step to illustrate the key features of economic modelling and to demonstrate the need for empirical evaluation of the models via econometric analysis.

Key Topics

• Economic modelling in practice
• The econometric approach
• The specific to general methodology of econometric analysis

1.1 Economic Theory and Modelling

Economic theories are developed to provide logical and coherent explanations of economic issues. These issues range from the activities of households and firms, to the activities of government relating to employment, inflation and economic growth.

Typically, economic theory consists of a set of conceptual definitions about the economic variables under consideration and a set of assumptions about the behaviour of economic agents, including households, firms and the government. Economists then follow a process of logical deduction deriving the implications of the assumptions. These implications are the predictions of the economic theory. They are usually reported as conditional statements in the form of testable hypotheses concerning the issues and causal linkages.

The implications of theory when configured as economic hypotheses constitute an economic model. Economic models are, therefore, derived from theoretical arguments and are, essentially, a simple representation of the complex real-world economic relationships. Economic models can be represented verbally, geometrically or algebraically. In this latter form, the relationship among economic variables implied by theoretical arguments is expressed by mathematical symbols and equations. These three types of presentation of economic models are frequently combined to explain various economic phenomena under examination.

Algebraic presentations of economic models have, however, a number of advantages. These are that they provide:

• frameworks within which the relationships among economic variables are expressed in consistent and logical sequences;
• the frameworks for the model builder to generalise theoretical arguments and ascertain implications;
• frameworks for the empirical investigation of economic hypotheses.

1.2 Economic Modelling in Practice

To illustrate the process of economic model building we develop two economic models. These are: (a) a model of household consumption expenditure, and (b) a model of demand for competitive imports.

1.2.1 A Model of Household Consumption Expenditure

This model is designed to explain factors influencing the planned consumption expenditure of a household. That is, the amount of expenditure that a household plans to spend out of income. There are a number of important theoretical contributions in this field. The simplest of these theories is the Keynesian absolute income hypothesis (AIH). In developing this theory, Keynes argued that, of the many factors that influence the level of household consumption expenditure, the most important is the level of household current disposable income. The way in which consumption expenditure is influenced by the disposable income i...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Dedication
• Contents
• List of figures & tables
• Preface
• Unit 1 Single-Equation Regression Models
• Unit 2 Simultaneous Equation Regression Models
• Unit 3 Qualitative Variables in Econometric Models – Panel Data Regression Models
• Unit 4 Time Series Econometrics
• Unit 5 Aspects of Financial Time Series Econometrics
• Appendix
• Index