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Introduction to Econometrics Department of Economics, Ave Maria University 1017 Academic Building, 10:45 – 11:50, MWF, Fall 2010 Professor Joseph Burke Phone: (239) 280-1613 Email: joseph.burke@avemaria.edu Office: 2055 Academic Building Office Hours: 8:30 to 9:30 Wednesdays Course Code: Econ 403 Prerequisites: Econ 202 Credits: 4 Course Description Econometrics is the application of statistical methods to economic problems. Econometrics is ubiquitous in the literature, and the knowledge of econometric terminology and methods is essential to anyone who wants to understand, critique, or contribute to debates regarding economic topics. Econometric and related statistical models are frequently used in disciplines, such as finance, sociology, and political science. The emphasis in this course is applied as opposed to theoretical. Students will not be expected to prove statistical results, but will become comfortable manipulating data, using econometric software, estimating and interpreting common econometric models, testing hypotheses, correcting for common statistical problems, and predicting economic behavior. They will also learn how econometric models relate to economic arguments and theories. Skills learned in this class have wide application in business, academic, and government research, and will prove invaluable in students’ thesis work. Econometrics is an essential tool for students who want to carry out academic research. It allows students to read economic data, to determine facts about the economy, to analyze data related to economic phenomena, and to explain and predict economic trends. Econometrics is part of the language of economics: economic arguments are often expressed in terms of econometrics, and students must know this language in order to make their own arguments. Expected Outcomes for Student Learning 1. This course will develop students’ knowledge of economic terminology and theory. They will learn the logic of statistical analysis and inference and will become familiar with the standard assumptions made in regression analysis. Students will learn about problems arising from collinearity, incorrect functional form specification, heteroskedasticity, autocorrelation, measurement errors, and endogenous dependent variables. They should know the consequences of these problems, and be able to test and correct for them where applicable. They will also learn some of the limitations of regression models. 2. This course will also develop students’ skills in using economic theory to explain and predict economic phenomena. They will learn to interpret the standard outputs reported in regression analysis and become familiar with econometric software, such as STATA and the statistical analysis functions available in Excel. They will be able to interpret the standard outputs reported in regression analysis, perform and interpret the results of t- and F-tests for the statistical significance of coefficients and other hypothesis tests, and construct and interpret confidence intervals. 3. This course will also develop students’ skills in making economic arguments and pursue economic research. They will learn to run uni- and multivariate regressions, how to estimate probit and logit models, and will become aware of other common econometrics models, such as Tobits, Poisson regressions, censored and truncated regressions, and Heckits. Students will also learn instrumental variables and simultaneous equation models are appropriate. Readings Hill, R. Carter, William E. Griffiths, and Guay C. Lim, Principles of Econometrics, Second Edition, Hoboken, NJ: John Wiley and Sons, 2007. Course Website The course website is http://amu-chemlab/~burke/ It is only accessible from the computer lab, not from the Internet. Lectures Lectures will be open to participation from students. Students are encouraged to ask questions and contribute to discussions. Office Hours Students are welcome to stop by and whenever I am in my office. As a rule, you should come to my office whenever you have worked on a problem for half an hour or more and still have not found the solution. It makes no sense to spend hours working on a problem by yourself when you could solve it in fifteen minutes with me; those who persist in doing so show poor economic reasoning skills. Class Participation and Quizzes Attendance is required, and class participation will count for 10% of the grade. Homework Homework will be regularly assigned, and due dates are given on the course schedule. Late homework will be penalized at 5% per day. Short quizzes may be regularly given throughout the course to make sure students are doing the reading. Economics is learned through reading the book, hearing the lectures, and doing the homework. If a student is not doing the reading, then he is more likely to have more difficulty following and comprehending the lectures. Homework will count for 40% of the grade for the course. Exams There will be one midterm and one final exam in the class. Both exams will be in-class exams. The exams will focus on the practice of econometrics, such as the purpose of various tests, interpreting the results of such tests, and appropriate methods of correction. Students will also be tested on the mathematics of econometrics, e.g. manipulating simple probability distributions, the algebra of expectations, etc. The midterm will count for 10% and the final for 20% of the student’s grade for the course. Papers Students must write one ten-page paper. The general structure of the paper is as follows: students will introduce a model, describe their data, estimate the model, conduct hypothesis tests and reestimate their models as appropriate, and then interpret the results. Students can estimate models described in the textbook or try to recreate the results of other models in the literature. Theoretical papers proving and discussion mathematical results related to econometrics will also be considered, but empirical papers are strongly preferred. A proposal for the paper will be due in September, an outline in October, a rough draft by Thanksgiving, and the final paper on the last day of class. The paper will count for 20% of the grade for the course. Students with Disabilities Any student who feels he or she may need an accommodation based on the impact of a disability should contact me privately within the first two weeks of class to discuss your specific needs. Please also contact the Counseling Services Office to coordinate reasonable accommodations for students with documented disabilities. Substitute Credit At the professor’s discretion, students may write papers or do other approved projects in order to improve their grade. This work will not be extra credit, and will not be added to the student’s grade, but accepted as a substitute for a previous assignment. This is ordinarily done only for students who are in danger of failing the course, and substitute credit will not be permitted for students who merely want to improve their grade. Students wishing to receive substitute credit for papers or other projects must submit proposals for their work and receive approval from Dr. Burke before their work will be accepted. Notice The instructor reserves the right to change or modify this course and the syllabus subject to appropriate and timely notice to the students enrolled in this class. Honor Code All students are expected to observe the honor code. Grading Participation and Quizzes 10% Homework 40% Midterm 10% Final 20% Paper 20% A Above 92.5% C 72.5 to 77.5% B+ 90 to 92.5% C- 70 to 72.5% B 87.5 to 90% D+ 67.5 to 70% B 82.5 to 87.5% D 62.5 to 67.5% B- 80 to 82.5% D- 60 to 62.5% C+ 77.5 to 80% F Below 60% Evaluation Strategies 1. Quizzes and participation in lectures will be used to evaluate students’ knowledge of the course material. Quizzes allow for a direct assessment of students’ progress, and participation for an indirect assessment, which can be seen, for instance, in the quality of questions asked during lecture. Quizzes and participation will be used in conjunction with the homework to evaluate their progress in the course. 2. Students’ knowledge of economic terminology and theory and their ability to explain and predict economic phenomena will be evaluated through homework. Nearly every major topic in the course will have at least one homework assignment: probability, expectations, uni- and multivariate regressions, heteroskedasticity, autocorrelation, dummy variables, multicollinearity, simultaneity, function form specification, and Probit models. 3. The midterm will test the student’s knowledge of material from the first half of the course. It will cover probabilities, expectations, uni- and multivariate regression, and functional form specification problems. 4. The final will test the student’s knowledge of all topics covered in the course. The final will be cumulative, and the student is expected to have mastered the material from the relevant chapters of the textbook by the end of the course. 5. The paper will test student’s knowledge of the material, their ability to conduct research, and their ability to formulate arguments. Corrections to Undergraduate Econometrics, Second Edition Chapter 2 The authors omit a useful formula for the covariance. An equivalent expression for the covariance formula in equation 2.5.1 is cov(X,Y) = E(XY) – E(X)E(Y). Chapter 3 In describing the assumptions of the linear regression model, the authors do not use conditioning notation, as they state in the text. Using this notation, the assumptions of the linear model are SR1. The value of y, for each value of x, is y = β 1 + β2 x + e SR2. The average value of the random error e is E(e|x) = 0 This implies E(y|x) = E(β1 + β2x + e|x) = β1 + β2x + E(e|x) = β1 + β2x SR3. The variance of the random error e is var(e|x) = σ2 = var(y|x) SR4. The covariance between any pair of random errors ei and ej is cov(ei,ej) = cov(yi,yj) = 0 If the values of y are statistically independent, then so are the random errors e, and vice versa. SR5. The variable X is not random, and must take on at least two different values. SR6. (optional) The values of e are normally distributed about their mean e~N(0,σ2) if the values of y are normally distributed, and vice versa. How to Find a Good Source for a Paper When looking for an authoritative source, it is always best to start at the top. Try and find the standard introductory textbook used at the top related department in the country. Say I wanted to write a paper contrasting Catholic and secular ideas about the family in sociology. I would first do a search for the top sociology departments in the country, and then, looking through the faculty directory to find out who taught undergraduate courses on the family, I would try and find who taught the introductory sociology course. I could then find the textbook used by that professor by either looking at his or her syllabus or calling him or her directly. If I was really ambitious, I would look for a graduate textbook. Once I had the name of a good textbook, I might then check reviews on amazon.com to see if there was a more authoritative or more clearly written book. Writing Notes 1. Be clear. 2. Be brief. 3. Use correct grammar. 4. Vary sentence structure. 5. Be entertaining. Use humor when appropriate. 6. Choose a topic you in which you are interested. 7. Avoid the passive voice whenever possible. 8. Liberally consult the Writing Center’s Handbook of Writing and Strunk and White. (Strunk, William Jr. and E. B. White, The Elements of Style Fourth Edition, New York: Longman, 2000.) 9. Cite all sources. 10. Do not plagiarize! 11. Do not worry about writing poorly. Some of the worst writers in the country make millions of dollars writing novels. 12. Do not worry about rejection or failure. All writers have these fears. If you do not do something for fear rejection, then you will never do anything.