What is Empirical Economics ?
Dr. Keshab Bhattarai1
HUBS
October 4, 2010
1 Business School, University of Hull, HU6 7RX, Hull,
Dr. Bhattarai (HUBS)
UK. email: [email protected]
Empirical Economics
October 4, 2010
1 / 19
What is emprical Economics?
1
It is testing economic theories from the evidence.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
1
Statistical and econometric analysis
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
1
2
Statistical and econometric analysis
Policy simulations
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
1
2
3
Statistical and econometric analysis
Policy simulations
Strategic modelling and experimental research
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
1
2
3
4
Statistical and econometric analysis
Policy simulations
Strategic modelling and experimental research
Qualitative analysis
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
What is emprical Economics?
1
2
It is testing economic theories from the evidence.
Economic theories establish cause e¤ect relation among economic
variables by
1
2
3
Empirical Analysis relates to estimating, calibrating unknown
parameters and computing the model to answer research questions. It
involves
1
2
3
4
4
Partial equilibrium analysis (relates few economic variables on the basis
of ceteris paribus) or by
General equilibrium analysis (interdependence among variables in the
system)
Statistical and econometric analysis
Policy simulations
Strategic modelling and experimental research
Qualitative analysis
Models are used for comparative statics or dynamic analysis.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
2 / 19
Guidelines for Empirical Research
1
2
3
4
5
6
7
8
Construction of hypotheses: specify one or more equations of a model
based on economic theories.
Show underlying theory using …rst and second order conditions of
optimisation or by solving a system of equations.
It helps to use diagrams to show these relations
Prepare most suitable data for analysis
Estimate parameters and check if signs or magnitudes of estimated
parameters or variables are consistent with the theory.
Analyse variance by R 2 , F and χ2 and signi…cance of coe¢ cient by t
tests.
Econometric tests: heteroskedasticity, autocorrelation, stationarity,
coitegration, mispeci…cation or measurement errors.
Write an essay or article based on research experience gained
following above steps.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
3 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
3
Eurostat:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
3
Eurostat:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
4
BHPS: http://www.esds.ac.uk/government/;
http://www.esds.ac.uk/government/surveys/
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
3
Eurostat:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
4
BHPS: http://www.esds.ac.uk/government/;
http://www.esds.ac.uk/government/surveys/
5
http://www.data-archive.ac.uk/…ndingData/bhpsTitles.asp
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
3
Eurostat:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
4
BHPS: http://www.esds.ac.uk/government/;
http://www.esds.ac.uk/government/surveys/
5
http://www.data-archive.ac.uk/…ndingData/bhpsTitles.asp
6
http://www.statistics.gov.uk
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Data sources
primary survey
secondary sources like
1
Economic and social data (ESDS) www.esds.ac.uk/international
2
datastream ; http://…nance.yahoo.com/
3
Eurostat:
http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themes
4
BHPS: http://www.esds.ac.uk/government/;
http://www.esds.ac.uk/government/surveys/
5
http://www.data-archive.ac.uk/…ndingData/bhpsTitles.asp
6
http://www.statistics.gov.uk
7
http://www.economicsnetwork.ac.uk/links/data_free#uk
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
4 / 19
Empirical economics:an example
Economic theory of consumer optimisation with a Cobb-Douglas utility
function:
Consumers problem: maximise utility subject to budget constraint
max U = C1α C21
α
s.t. P1 C1 + P2 C2 = I
(1)
Here P1 and P2 are prices of C1 and C2 goods and I is income of the
consumer
Demand function for C1 :
C1 =
αI
P1
(2)
Demand function for C2 :
C2 =
Dr. Bhattarai (HUBS)
(1
α) I
(3)
P2
Empirical Economics
October 4, 2010
5 / 19
Empirical speci…cation
Empirical analysis requires some manipulation of the original derivation.
It is easier to convert this nonlinear demand function to a linear one by
taking logs as:
ln C1 = ln α + ln I
ln P1
There are i = 1...n consumers. De…ne ln C1,i = Yi ;
ln P1,i = β2 Xi ;
(4)
β1 = ln α + ln I ;
Yi = β1 + β2 Xi + ei
(5)
Expected signs of intercept β1 > 0. This is the demand expected when
price is zero; component of demand that does not respond to price leve.
Slope β2 < 0 for a normal good when prices rise demand will fall.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
6 / 19
Preparing data for demand analysis
Let us consider demand for wheat.
Data on individual commodities can be obtained from various surces such
as
http://www.ers.usda.gov/Data/Wheat/YBtable01.asp
When data is constructed the unknown parameters β1 and β2 can be
estimated.
See data …le wheat.csv
Table: Regression of wheat production on its price
Coe¢ cient Stadard Error
Intercept
29.44
4.02
Wheat price
1.12
0.99
2
R = 0.06 , F = 1.3 , N = 23.
t-value
7.32
1.12
This is not a strong relation, need to do more research. Derivation of OLS
estimators and test to follow next week.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
7 / 19
Micro theories
Smith (1776), Ricardo (1817), Cournot (1838), Bertrand (1883),
Edgeworth (1925), Pareto (1896), Marshall (1890), Walras (1900) Veblen
(1904), Slutskey (1915), Hicks (1939), Samuelson (1947), von Neumann
and Morgenstern (1944), Nash (1950), Neumann (1957), Arrow (1953),
Debreau (1959), Stigler (1961), Kuhn (1953), Shapley (1953), Robinson
(1963), Shelten ( 1965), Aumann (1966) Scarf (1967), Shapley and
Shubic (1969), Harsanyi (1967), Spence (1974), Kreps (1990),
Fundenberg and Tirole (1991) and Binmore (1992).Hurwicz (1973),
Myerson (1986), Maskin and Tirole (1989), Kreps (1990), Fundenberg and
Tirole (1991) Binmore (1992), Rubinstein (1982) Sutton (1986) Cho and
Kreps (1987) Sobel (1985) Machina (1987) Riley (1979)
McCormick (1990), Ghosal and Morelli (2004) and others.
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
8 / 19
Macro theories:
Smith (1776), Ricardo (1817), Malthus (1818) Marx ( ), Keynes (1936),
Hicks (1937), Samuelson (1939),
Phillips (1958), Friedman (1968), Phelps (1968), Tobin (1969),Sargent
and Wallace (1975), Lucas (1976), Fisher (1977), Kydland and Prescott
(1977) ,Wallis (1980), King and Plosser (1984) Mankiw (1989), Prescott
(1986), Taylor (1987)Blanchard and Kiyotaki (1987), Manning (1995),
Rankin (1992)Barro and Gordon (1983), Sargent (1986) Goodhart (1989),
Nickell (1990), Mankiw and Romer(1993), Lockwood Miller and Zhang
(1998) Wallis (1989), MPC (1999), Pagan and Wickens (1989), Hendry
(1995), Holly Weale (2000)Taylor (1993), Sargent and Ljungqvists (2000),
Minford and Peel (2002), Blake and Weal (2003), Garratt, Lee, Pesaran
and Shin (2003)Solow (1956), Lucas (1988), Romer (1990), Mankiw,
Romer and Weil (1992),Harrod (1939), Domar (1947) and Solow (1956),
Parente and Prescott (1993)Fullerton, Shoven and Whalley (1983),
Auerbach and Kotliko¤ (1987), Perroni (1995), Rutherford (1995), Bank
of England, NIESR) Kehoe, Srinivasan and Whalley (2005), Bhattarai
(1997, 1999)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
9 / 19
Growth
Maddison (1991), Ramsey (1928), Hicks (1937), Harrod (1939), Domar
(1947), Solow (1956), Kaldor (1961), Uzawa (1962) Cass (1965),
Koopmans (1965), Lucas (1988), Romer (1989), Parente (1994), Perroni
(1995), Sargent and Ljungqvist (2005)
Bandhopadyay and Basu (2005), Basu and Bhattarai (2009)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
10 / 19
Trade and exchange rates
Ricardo (1817), Heckscher-Olhin (19919) Stopler-Samuelson (1955),
Mundell R. A (1962) , Kemp (1962), Krugman (1979), Johnson (1967)
Meade (1955), Neary (1980), Neary, P. (2002), Melitz M. T. (2003)
,Krugman P. (1980), Katz M. L and Shapiro C. (1985) , Melvin J. R.
(1989) Whalley, J. (1985) ,Harrison, G.W., T.F.Rutherford and D.G. Tarr
(1997) ,Hertel, T. (1997) Economides N. (1996) , Perroni, C. and J.
Whalley (1996), Epifani, P. and G. Gancia (2008), Kim, S. J. and Y. J.
Kim (2000), Greenaway and Milner (1986), Grossman, G.M. and E.
Helpman (1990)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
11 / 19
Foreign Direct Investment (FDI)
Asheghian, Parviz, (2004), Atken Brian J and Ann E. Harrison (1999)
,Balasubramanyam„ V.,N., M. Salisu and David Sapsford (1996) ’Barrell,
Ray and Nigel Pain, (1997) ’Batra Raveendra N., (1986) , Batra,
Raveendra., N. and Rama Ramachandran, , (1980), Bergstrand Je¤rey H.
and Peter Egger (2007),Bhagwati, Jagdih. N., Ernesto Tironi,
(1980),Binh, NGuyen, N., and Jonathan Haughton, 2002,Blomstrom
Magnus, Robert E. Lipsey and Mario Zejan (1996) ,Blough Roy,
(1956),Boatwright, B.D. and Renton, G. A. (1975), Borensztein, E, J. De
Gregorio,J.W. Lee (1998) Buckley, Peter., J. And MarkCasson, (1981)
,Calderon Russell, Togret R., (1985) Campa, Jose M. (1993). Caves,
R.,E., (1982) ,Cheng, L., Qiu, L.D.,Tan, G. (2005) ,Coughlin Cletus, C.,
Joseph V Terza and Vachira Arromdee , (1991) ,de Mello, Luiz R.. (1999)
,Desai Mihir.A. C. F. Foley, James R.Hines J.R. (2005) ,Doornik J A and
Hendry D.F. (2001) ,Eaton Jonathan and Samuel Kortum (2002)
Feldstein, Martin and Charles Horioka (1980)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
12 / 19
Public Finance:
Pigou (1947), Samuelson (1954), Buchanan (1965), Atksinson and Stern
(1974), Feldstein (1974), Whalley (1975), Boadway (1979), Summer
(1980), Blomquest (1985), Bovenberg (1989), Benabou (2002) and
Taveres (2004), Fullerton and Heutel (2007), Chen(2007)) Harberger
(1962), Uzawa (1962), Cass (1965), Atkinson (1971), Goulder and
Summers (1989), King and Rebelo (1993), Perroni (1995), Cummins,
Hasset and Hubbard (1996), Rust and Phelan (1997), Dhillon, Perroni and
Scharf(1999), Wagsta¤ (1999), Caucutt, Imrohoroglu and Kumar (2006),
Krueckner (2006), Di Tella and MacCullock (2006), Jha (2008)
Boadway (1984), Musgrave and Musgrave (1980) Atkinson and Stiglitz
(1980), Myles (1995), Muller (1991), Shoven and Whalley (1992) and
Hillman (2003)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
13 / 19
Energy:
Bohringer and Rutherford ( 2004) Grubb (2004) Green and Newbery
(1992), Manne and Richel (1992), McFarland, Reilly and Herzog (2002)
Nordhaus (1979), Perroni and Rutherford (1993), Backus and Crucini
(2000), Boyd and Doroodian (2001), Coupal and Holland (2002),
Grepperud and Rasmussen (2004), Jansen and Klaassen (2000),
Kumbaroglu (2003), Spear( 2003) and Thompson (2000);Aronsson,
(1999), Bohringer and Conrad and Loschel (2003), Crettez and Aronsson
(1999), Crettez (2004) Dissou, Mac Leod, and Souissi (2002), Faehn and
Holmoy (2003) Nordhaus and Yang (1996), Proost and Van Regemorter
(1992), Rasmussen (2001), Kumbaroglu (2003), Roson (2003) , Uri and
Boyd (1996) and Vennemo (1997)
DEFRA Report (various years), Kyoto Protocol (1997), Glenn Eagle
summit (2005), Stern Report (2006)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
14 / 19
Multisectoral General Equilibrium Models
Auerbach and Kotliko¤ (1987), Rutherford (1995), Kehoe, SriNivashan
and Whalley (2005). Leontief (1949), Harberger (1962), Jorgensen (1961)
Ballard-Fullerton-Shoven-Whalley (BFSW(1985)), and Robinson (1991),
Fullerton and Rogers (1993), Mercenier and Srinivasan (1994) and Dixon
et al. (1992)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
15 / 19
Poverty
Smith (1776) Rowntree B. S. (1902) Hansen A H (1926) Keezer D M
(1943) Davis J. S, (1945) Atkinson, A. B.:(1970)
Sen A. (1976) Beckerman W. (1979) Schultz TW (1979) Townsend P.
(1979) Kakwani N. (1980) Danziger and Gottschalk,(1983) Cutler (1984)
Basu,(1985) Piachaud(1987) Pyatt G (1987) Swinton,(1987) Atkinson, A.
B.:(1987) Kniesner T. J., M B McElroy and S P Wilcox (1988) Lewis G.
W. and D.T. Ulph (1988) Hagenaars and Vos, Klaas de (1988)
Davidson(1988) Webb S (1889) Brown J C (1990) Jenkins(1991) Sharif
(1991) Gaude and Watzlawick(1992) Keen M (1992) Blackburn(1994)
Zheng (1994) Preston (1995) Bardhan P (1996) Ravallion M. (1996)
Whitehouse E. (1996) Barrington L (1997)
Betson D.M. and J L Warlick (1998) Triest R K (1998) Besley T, R.
Burgess (2003) Blaug M (1963) Casper L M (1994)
Shorrocks A. F. (1995) Slesnick D.T. (1996) Deaton A (1998) Haveman R
A Bershadker (1998) Foster J. E. (1998)
Foster J E and A F Shorrocks (1988) Gar…nkel I. (1994) Micklewright J
and K Stewart (1999) Guo G, K.M. Harris (2000)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
16 / 19
Manpower and Labour Economics
Schultz T.P., (1998), Heckman J. J., (1979), Mincer J., (1974), Murphy
K.M., Welch F., (1990)’Blundell, R. W., Ham J.C. and Meghir C (1969),
Hausman J.A., (1978), Killingsworth M. (1983) ,Hamermesh D. S. (1993),
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
17 / 19
Econometrics
Arrelano-Bond (1991), Blundell-Bond (1998), Andrews DWK (1999),
Eviews (Chapter 20), STATA (pages 571-531), Stock -Wright-Yogo
(2002), Wiedkeijer (2000); Arulampalam W. and Booth A.L., (1998),
Blanchard O and D Quah (1989) ;Blundell R W and R J. Smith (1989)
,Chesher A (1984) ,Dickey D.A. and W.A. Fuller (1979) ,Engle R E and
C.W.J. Granger (1987) ,Hansen L.P. (1982) ,Hausman J.A., (1978),
Heckman J. J., (1979) ,Imbens G. W. and T Lancaster (1994) ,Keifer N
(1988) ,Hendry D.F. (1997)
Pedroni, P. (1999),Pesaran, M.H. and R. Smith (1995),Phillips P.C.B.
(1987) ,Johansen Soren (1988) ,Johansen Soren (1988)
Staigler D., Stock J. H., (1997), Lancaster T (1979) ,Zellner A. (1985)
Anderson TW (1984) ,Kendall Maurice (1975) ,Koop Gary (2008) ,Stock
& Watson (2007) ,Woolddrige J.M. (2006)
Rao C R (1972) ,Wishart J (1955)
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
18 / 19
UK Economy
Holly and Weale (2000), Hendry and Clement (2000), Church, Mitchel,
Sault and Wallis (2000), Cook and Turner (2000) , Fisher and Whitley
(2000), Garratt, Lee, Pesaran and Shin (2000), Mellis and Whittaker
(2000), Grubb, Jamasb and Pollitt (2008).
Swayer (2005), Hull Economists;
http://nobelprize.org/nobel_prizes/economics/laureates/;
http://www.economicsnetwork.ac.uk/
;http://cepa.newschool.edu/het/schools/game.htm;
http://www.hull.ac.uk/php/ecskrb/Confer/research.html;
http://homepage.newschool.edu/het/alphabet.htm
Dr. Bhattarai (HUBS)
Empirical Economics
October 4, 2010
19 / 19