Intro to Econometric Analysis

7/25/2019 Intro to Econometric Analysis

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Applied Econometric AnalysisLecture 1
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What is Econometrics

Econometrics is based upon the development of statisticalmethods for estimating economic relationships, testingeconomic theories, and evaluating and implementinggovernment and business policy.

The applications of econometrics include Forecasting macroeconomic variables like interest rates,

inflation rates, Gross domestic product etc

We can study the effects of political campaign expenditures onvoting outcomes.

We can consider the effect of school spending on studentperformance in the field of education.
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Applications

Title: The Market Impacts of Pharmaceutical Product

Patents in Developing Countries: Evidence from India(American Economic Review, 2016, 106(1): 99-135) by MarkDuggan, Craig Garthwaite and Aparajita Goyal.

Abstract: In 2005, as the result of a World Trade Organization

mandate,India implemented a patent reform for pharmaceuticalsthat was intended to comply with the 1995 Trade-Related Aspects

of Intellectual Property Rights (TRIPS). Exploiting variation in the

timing of patent decisions, we estimate that a molecule receiving a

patent experienced an average price increase of just 3-6

percent,with larger increases for more recently developed moleculesand for those produced by just one firm when the patent system

began. Our results also show little impact on quantities sold or on

the number of pharmaceutical firms operating in the market.


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Title: Are Sticky Prices Costly? Evidence from the StockMarket (American Economic Review, 2016, 106(1): 165-199)

by Yuriy Gorodnichenko and Michael Weber. Abstract: We show that after monetary policy announcements, the

conditional volatility of stock market returns rises more for firms

with stickier prices than for firms with more flexible prices. This

differential reaction is economically large and strikingly robust to abroad array of checks. These results suggest that menu

costs-broadly defined to include physical costs of price adjustment,

informational frictions,etc.-are an important factor for nominal price

rigidity at the micro level. We also show that our empirical results

are qualitatively and, under plausible calibrations, quantitativelyconsistent with New Keynesian macroeconomic models in which

firms have heterogeneous price stickiness.
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Title: Where is the Land of Opportunity? The Geography ofIntergenerational Mobility in the United States (QuarterlyJournal of Economics, 2014, 129(4): 1553-1623) by RajChetty, Nathaniel Hendren, Patrick Kline, and Emmanuel

Saez. Abstract: We use administrative records on the incomes of more than 40

million children and their parents to describe three features ofintergenerational mobility in the United States. First, we characterize thejoint distribution of parent and child income at the national level. The

conditional expectation of child income given parent income is linear inpercentile ranks. On average, a 10 percentile increase in parent income isassociated with a 3.4 percentile increase in a childs income. Second,intergenerational mobility varies substantially across areas within the U.S.For example, the probability that a child reaches the top quintile of thenational income distribution starting from a family in the bottom quintile

is 4.4% in Charlotte but 12.9% in San Jose. Third, we explore the factorscorrelated with upward mobility. High mobility areas have (1) lessresidential segregation, (2) less income inequality, (3) better primaryschools, (4) greater social capital, and (5) greater family stability. Whileour descriptive analysis does not identify the causal mechanisms thatdetermine upward mobility, the publicly available statistics onintergenerational mobility developed here can facilitate research on such
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Title: Up in Smoke: The Influence of Household Behavior onthe Long-Run Impact of Improved Cooking Stoves (AEJ:Economic Policy, forthcoming) by Esther Duflo, Rema Hanna

and Michael Greenstone Abstract: It is conventional wisdom that it is possible to reduce exposure to

indoor air pollution, improve health outcomes, and decrease greenhouse gasemissions in rural areas of developing countries through the adoption ofimproved cooking stoves. This is largely supported by observational field studiesand engineering or laboratory experiments. However, we provide new evidence,from a randomized control trial conducted in rural Orissa, India (one of thepoorest places in India) on the benefits of a commonly used improved stove thatlaboratory tests showed to reduce indoor air pollution and require less fuel. Wetrack households for up to four years after they received the stove. While wefind a meaningful reduction in smoke inhalation in the first year, there is noeffect over longer time horizons. We find no evidence of improvements in lungfunctioning or health and there is no change in fuel consumption (and

presumably greenhouse gas emissions). The difference between the laboratoryand field findings appears to result from households revealed low valuation ofthe stoves. Households failed to use the stoves regularly or appropriately, didnot make the necessary investments to maintain them properly, and usage ratesultimately declined further over time. More broadly, this study underscores theneed to test environmental and health technologies in real-world settings wherebehavior may temper impacts, and to test them over a long enough horizon to

understand how this behavioral effect evolves over time.


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Why econometrics as a separate discipline ?

(Source: Lecture notes by Jaap H. Abbring)

The existence of econometrics as a separate discipline isjustified by the fact that that statistics alone does not provide

answer interesting economic questions. Unlike some of the natural sciences, economic problems

cannot be analyzed in controlled and experimental methods.

Economic theory can be used to provide additional structure

to analyze the data.


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Example: A lot of research focuses on the disadvantageousposition of African-Americans in the USA in terms ofemployment, income and education. One may conjecture thatdiscrimination is the cause of less income for theAfrican-Americans.

Human capital theory in economics predicts that given thesame level of human capital accumulation, people are like to

earn equally.

So one may take data of people with equal education and seeif there is really low income for African-Americans or not.

But the data set may not be proper. The reason is that

economic theory tells discrimination induces people to investless in education and experience.

So the overall wage differential between blacks and whitesshould be taken to account rather than the conditional wage

differential.


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The black-white median wage differential has narrowed from

50% in 19040s to 30% in 1980s (example taken fromHeckmans 2000 Nobel lecture).

This seems to suggest that there is improvement in theposition of the blacks in the USA.

But it may be the case that black people have dropped out oflabor force at a much higher rate that the white people in thisperiod and we may get this anomaly in the data analysis.

If we correct for this dropout, then Heckman points out that

there is no improvement in the position of blacks. Statistics is agnostic about a correction for selection into

employment.
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Intro to Econometric Analysis

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