Applied Econometrics

William Greene
Department of Economics
Stern School of Business
Applied Econometrics
1. The Paradigm of Econometrics
Econometrics: Paradigm
Theoretical foundations
Microeconometrics and macroeconometrics
Behavioral modeling: Optimization, labor
supply, demand equations, etc.
Statistical foundations
Mathematical Elements
Model building the econometric model
Mathematical elements
The underlying truth is there one?
What is bias in model estimation?
Why Use This Framework?
Understanding covariation
Understanding the relationship:
Estimation of quantities of interest such as
elasticities
Prediction of the outcome of interest
Controlling future outcomes using knowledge of
relationships
Measurement as Observation

Population Measurement
Theory
Characteristics
Behavior Patterns
Choices
Inference

Population Measurement

Econometrics
Characteristics
Behavior Patterns
Choices
Model Building in Econometrics
Role of the assumptions
Sharpness of inferences
Parameterizing the model
Nonparametric analysis
Semiparametric analysis
Parametric analysis
Application: Is there a relationship between
investment and capital stock? (10 firms, 20
years)

Nonparametric Regression
Nonparametric Regression of Investment on Capital Stock
KC
5 0 0
1 0 0 0
1 5 0 0
2 0 0 0
0
5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0
I
n
v
s
t
m
n
t

What are the assumptions?
What are the conclusions?
E
E
(
=
(


=
= A A
A =
+
N
i=1 i i
N
i=1 i
i
0.2
Kernel Regression
w (z)y

F(z)=
w (z)
x -z 1
( ) K
.9 / N
(t) (t)[1 (t)]
exp(t)
(t)
1 exp(t)
i
w z
s
K
Semiparametric Regression
Investment
i,t
= a + b*Capital
i,t
+ u
i,t
Median[u
i,t
| Capital
i,t
] = 0

Least Absolute Deviations Regression of I on C
C
3 2 0
6 4 0
9 6 0
1 2 8 0
1 6 0 0
0
5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0
I I L AD
I
n
v
s
t
m
n
t

=

N
a,b i i
i 1
Least Absolute Deviations

F(x)=a+bx

a,b=ArgMin |y a-bx |
Parametric Regression
Investment
i,t
= a + b*Capital
i,t
+ u
i,t
u
i,t
| Capital
j,s
~ N[0,o
2
] for all i,j,s,t

Least Squares Regression of Investment on Capital
C
3 2 0
6 4 0
9 6 0
1 2 8 0
1 6 0 0
0
5 0 0 1 0 0 0 1 5 0 0 2 0 0 0 2 5 0 0 0
Re g re s s i o n l i n e i s I = 1 4 . 2 3 6 2 1 + . 4 7 7 2 2 C
I
n
v
s
t
m
n
t

=

(
'
(
| | | | | |
(
( | | |
(
\ . \ . \ .

N
2
a,b i i
i 1
1
N N
i=1 i=1
i i i
Least Squares Regression

F(x)=a+bx

a,b=ArgMin (y a-bx )
1 1 1
= y
x x x
i
Estimation Platforms
The best use of a body of data
The accretion of knowledge
Model based
Kernels and smoothing methods (nonparametric)
Moments and quantiles (semiparametric)
Likelihood and M- estimators (parametric)
Methodology based (?)
Classical parametric and semiparametric
Bayesian strongly parametric

Classical Inference

Population Measurement

Econometrics
Characteristics
Behavior Patterns
Choices
Imprecise inference about
the entire population
sampling theory and
asymptotics
Bayesian Inference

Population Measurement

Econometrics
Characteristics
Behavior Patterns
Choices
Sharp, exact inference about
only the sample the posterior
density.
Empirical Research
Iterative search for information about the
structure
Specification searches
Stepwise modeling, data mining, etc.
Leamer on specification searching and significance
levels
Judge, et al. on sequential inference and pretesting
Hendry on the encompassing principle general to
specific
Classical estimation and inference
Data Structures
Observation mechanisms
Passive, nonexperimental
Active, experimental
The natural experiment
Data types
Cross section
Pure time series
Panel longitudinal data
Financial data
Econometric Models
Linear; static and dynamic
Discrete choice
Censoring and truncation
Structural models and demand systems
Estimation Methods and Applications
Least squares etc. OLS, GLS, LAD, quantile
Maximum likelihood
Formal ML
Maximum simulated likelihood
Robust and M- estimation
Instrumental variables and GMM
Bayesian estimation Markov Chain Monte
Carlo methods
Trends in Econometrics
Small structural models vs. large scale multiple equation
models
Parametric vs. non- and semiparametric methods
Robust methods GMM (paradigm shift?)
Unit roots, cointegration and macroeconometrics
Nonlinear modeling and the role of software
Behavioral and structural modeling vs. covariance
analysis pervasiveness of the econometrics paradigm
Course Objective

Develop the tools needed to read
about with understanding and to
do empirical research in
economics using the current
body of techniques.
Prerequisites
A previous course that used regression
Mathematical statistics
Matrix algebra

We will do some proofs and derivations
We will also examine empirical applications
The Course Outline
Topics
Sequence
Timing
No class on: Tuesday September 30
Thursday, October 9
Thursday, November 27
Readings
Main text: Greene, W., Econometric Analysis,
6
th
Edition, Prentice Hall, 2008.
A few articles
Notes on the course website:
http://www.stern.nyu.edu/~wgreene/Econometrics
/Econometrics.htm

Course Applications
Software
LIMDEP/NLOGIT provided, supported
SAS, Stata optional, your choice
Gauss, Matlab, others
Lab sessions: Fridays? To be determined
Problem sets
Software
Questions and review as requested
Term Paper Application (more details later)
Course Requirements
Problem sets: approximately 6 (15%)
Midterm, in class (30%)
Final exam (40%)
Term paper/project: Application of method(s)
developed in class to a live data set. (15%)
Enthusiasm