Essential Econometric Techniques

A Guide to Concepts and Applications

Elia Kacapyr

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000538588
• Edition: 3
• Topic: Economics
• Subtopic: Econometrics
• Index: Economics

Now in its third edition, Essential Econometric Techniques: A Guide to Concepts and Applications is a concise, student-friendly textbook which provides an introductory grounding in econometrics, with an emphasis on the proper application and interpretation of results.

Drawing on the author's extensive teaching experience, this book offers intuitive explanations of concepts such as heteroskedasticity and serial correlation, and provides step-by-step overviews of each key topic.

This new edition contains more applications, brings in new material including a dedicated chapter on panel data techniques, and moves the theoretical proofs to appendices. After Chapter 7, students will be able to design and conduct rudimentary econometric research. The next chapters cover multicollinearity, heteroskedasticity, and autocorrelation, followed by techniques for time-series analysis and panel data.

Excel data sets for the end-of-chapter problems are available as a digital supplement. A solutions manual is also available for instructors, as well as PowerPoint slides for each chapter.

Essential Econometric Techniques shows students how economic hypotheses can be questioned and tested using real-world data, and is the ideal supplementary text for all introductory econometrics courses.

1 The Nature of Econometrics

DOI: 10.4324/9781003213758-1

What Is Econometrics?

Literally, econometrics means “economic measurement.” Therefore, gathering data and generating economic statistics such as gross domestic product and the consumer price index could be considered econometrics. In practice econometrics is about testing economic hypotheses with statistical techniques. Respected econometricians have given us a variety of definitions. One favorite, perhaps because of its brevity, is from Henri Theil: “Econometrics is concerned with the empirical determination of economic laws” (Theil 1971, p. 1).

Economics is comprised of innumerable laws, theories, hypotheses, assumptions, and suppositions. Econometrics is subjecting any of these to empirical verification. Empirical means “by observation or experience.” Rather than argumentation or debate, econometrics is about testing economic ideas to see if they hold true.

Students may say that econometrics is like a mash-up of their statistics course with an economics course. That is not a bad description of an econometrics class; only it conceals the main point—econometrics is about testing a proposition of some sort.

Data mining is a field similar to econometrics. The difference is that data miners say, “Let's see what the data reveal about this idea.” Econometricians say, “Let's get the data and test if this idea holds true.” This may seem like a trifling difference, but it turns out to be important. Data miners comb the data for interesting relationships. Econometricians use the data to test if a specific idea can be rejected or not.

The Econometric Methodology

Econometric tests are based on scientific method:

1. Ask a question, or state a theory
2. Design a way to test the idea
3. Conduct the test
4. Reject or do not reject the idea

In econometrics, the steps are more explicit:

1. State the idea to be tested
2. Specify the econometric model
3. Collect the data
4. Estimate the parameters of the model
5. Use the model to test the idea
6. Forecast with the model

As an application of the econometric method, consider Keynes’ law of consumption:

The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed, as a rule and on average, to increase their consumption as their income increases, but not by as much as the increase in income.

(Keynes 1936, p. 96)

Now apply the steps of the econometric methodology to test this law.

1. State the theory, law, or hypothesis

It is impossible to state Keynes’ law more eloquently than the master economist himself. However, it may be stated more succinctly: when income goes up, consumer spending goes up, but not by as much.

2. Specify the econometric model

This step requires writing the idea in mathematical form. One of the simplest forms is the equation of a straight line: y = mx + b. To state Keynes’ law in linear...