# Dictionary Definition

econometric adj : of or relating to econometrics;
"econometric theories"

# User Contributed Dictionary

## English

### Adjective

- Combining economics and mathematics.
- an econometric study

#### Related terms

# Extensive Definition

Econometrics is concerned with the tasks of
developing and applying quantitative or statistical methods to the
study and elucidation of economic principles. Econometrics combines
economic theory with
statistics to analyze
and test economic relationships. Theoretical econometrics considers
questions about the statistical properties of estimators and tests,
while applied econometrics is concerned with the application of
econometric methods to assess economic theories. Although the first
known use of the term "econometrics" was by Pawel Ciompa in 1910,
Ragnar Frisch is given credit for coining the term in the sense
that it is used today.

Although many econometric methods represent
applications of standard statistical
models, there are some special features of economic
data that distinguish econometrics from other branches of
statistics. Economic data are generally observational,
rather than being derived from controlled experiments.
Because the individual units in an economy interact with each
other, the observed data tend to reflect complex economic
equilibrium conditions rather than simple behavioral
relationships based on preferences or technology.
Consequently, the field of econometrics has developed methods for
identification and estimation
of
simultaneous equation models. Early work in econometrics
focused on time-series
data, but now econometrics also fully covers cross-sectional
and panel
data.

## Purpose

The two main purposes of econometrics are to give empirical content to economic theory and to subject economic theory to potentially falsifying tests.Data sets to
which econometric analyses are applied can be classified as
time-series
data, cross-sectional
data, panel data,
and
multidimensional panel data. Time-series data sets contain
observations over time; for example, inflation over the course of
several years. Cross-sectional data sets contain observations at a
single point in time; for example, many individuals' incomes in a
given year. Panel data sets contain both time-series and
cross-sectional observations. Multi-dimensional panel data sets
contain observations across time, cross-sectionally, and across
some third dimension. For example, the Survey of Professional
Forecasters contains forecasts for many forecasters
(cross-sectional observations), at many points in time (time series
observations), and at multiple forecast horizons (a third
dimension).

Econometric analysis may also be classified on
the basis of the number of relationships modelled.
Single equation methods model a single variable (the dependent
variable) as a function of one or more explanatory (or
independent) variables. In many econometric contexts, such single
equation methods may not recover the effect desired, or may produce
estimates with poor statistical properties.
Simultaneous equation methods have been developed as one means
of addressing these problems. Many of these methods use variants of
instrumental
variable to make estimates.

Other important methods include Method of
Moments, Generalized Method of Moments (GMM),
Bayesian
methods, Two Stage Least Squares (2SLS), and Three Stage
Least Squares (3SLS).

### Example

A simple example of a relationship in econometrics from the field of labor economics is:- \ln(\text) = \beta_0 + \beta_1 (\text) + \varepsilon.

Economic theory says that the natural logarithm
of a person's wage is a linear function of the number of years of
education that person has acquired. The parameter \beta_1 measures
the increase in the natural log of the wage attributable to one
more year of education. It should be noted that by using the
natural log we have moved away from a simple linear regression
model and are now using a non linear model, in this case, a
semi-log y model. The term \epsilon is a random variable
representing all other factors that may have direct influence on
wage. The econometric goal is to estimate the parameters, \beta_0
\mbox \beta_1 under specific assumptions about the random variable
\epsilon. For example, if \epsilon and Years of Education are
uncorrelated, then the equation can be estimated with ordinary
least squares.

If the researcher could randomly assign people to
different levels of education, the data set thus generated would
allow the econometrician to estimate the effect of changes in years
of education on wages. In reality, those experiments cannot be
conducted. Instead, the econometrician observes the years of
education of and the wages paid to people who differ along many
dimensions. Given this kind of data, the estimated coefficient on
Years of Education in the equation above reflects both the effect
of education on wages and the effect of other variables on wages,
if those other variables were correlated with education. For
example, people with more innate ability may have higher wages and
higher levels of education. Unless the econometrician controls for
innate ability in the above equation, the effect of innate ability
on wages may be falsely attributed to the effect of education on
wages.

The most obvious way to control for innate
ability is to include a measure of ability in the equation above.
Exclusion of innate ability, together with the assumption that
\epsilon is uncorrelated with education produces a misspecified
model. A second technique for dealing with omitted variables is
instrumental
variables estimation.

## Notable econometricians

The following are the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel recipients in the field of econometrics:- Jan Tinbergen and Ragnar Frisch were awarded the first Nobel Prize for Economic Sciences in 1969 for having developed and applied dynamic models for the analysis of economic processes.
- Lawrence Klein, Professor of Economics at the University of Pennsylvania, was awarded in 1980 for his computer modeling work in the field.
- Trygve Haavelmo was awarded in 1989. His main contribution to econometrics was his 1944 article (published in Econometrica) "The Probability Approach to Econometrics."
- Daniel McFadden and James Heckman shared the award in 2000 for their work in microeconometrics. McFadden founded the econometrics lab at the University of California, Berkeley.
- Robert Engle and Clive Granger at the University of California, San Diego, were awarded in 2003 for work on analyzing economic time series. Engle pioneered the method of autoregressive conditional heteroskedasticity (ARCH) and Granger the method of cointegration.

The Econometric
Author Links of the Econometrics Journal provides personal
links to recent articles and working papers of econometric authors
via the RePEc system in EconPapers.

## Journals

The main journals which publish work in econometrics are Econometrica, the Journal of Econometrics, the Review of Economics and Statistics, the Econometric Theory, the Journal of Applied Econometrics, the Econometric Reviews, and the Journal of Business and Economic Statistics .## Notes

## References

- Handbook of Econometrics Elsevier, links to:

- v. 1, pp. 3-771 (1983)
- v. 2, pp. 775-1461 (1984)
- v. 3, pp. 1465-2107 (1986)
- v. 4, pp. 2111-3155 (1994)
- v. 5, pp. 3159-3843 (2001)
- v. 6, Part 1, pp. 3845-4776 (2007)
- v. 6, Part 2, pp. 4777-5752 (2007)

- Harry H. Kelejian and Wallace E. Oates (1989, 3rd ed.) Introduction to Econometrics.
- Peter Kennedy (2003). A Guide to Econometrics, 5th ed. Preview.
- Robert S. Pindyck and Daniel L. Rubinfeld (1998, 4th ed.).
- A.H. Studenmund (2000, 4th ed.) Using Econometrics: A Practical Guide.

## See also

- Correlation does not imply causation
- Choice Modelling
- Modeling and analysis of financial markets
- Important publications in econometrics
- MacKinnon, James and Davidson, Russell. Econometric Theory and Methods. New York: Oxford University Press, 2004.
- Wooldridge, Jeffrey. Introductory Econometrics: A Modern Approach. Mason: Thomson South-Western, 2003. ISBN 0-324-11364-1
- Gretl, the Gnu Regression, Econometrics and Time Series Library, open source and free software for econometrics..
- Hayashi, Fumio. Econometrics. Princeton University Press, 2000.
- Econometric Links
- Single equation methods (econometrics)
- Granger causality
- Augmented Dickey-Fuller test
- Unit root
- Applied Econometric Association
- Pearl, J. Causality: Models, Reasoning and Inference, Cambridge University Press, 2000.
- "The Art and Science of Cause and Effect": a slide show and tutorial lecture by Judea Pearl

## Study Resources

- MERLOT Learning materials in Econometrics (US-based catalogue of materials)
- Teaching Econometrics (Index by the Economics Network (UK))
- Econometric Theory book on Wikibooks

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