Econometrics is concerned with the tasks of developing and applying quantitative In the social sciences, quantitative research refers to the systematic empirical investigation of quantitative properties and phenomena and their relationships. The objective of quantitative research is to develop and employ mathematical models, theories and/or hypotheses pertaining to phenomena. The process of measurement is central to or statistical Statistics is the formal science of making effective use of numerical data relating to groups of individuals or experiments. It deals with all aspects of this, including not only the collection, analysis and interpretation of such data, but also the planning of the collection of data, in terms of the design of surveys and experiments methods to the study and elucidation of economic principles.^[1] Econometrics combines economic theory Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οἰκονομία from οἶκος (oikos, "house") + νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)". Current economic with statistics Statistics is the formal science of making effective use of numerical data relating to groups of individuals or experiments. It deals with all aspects of this, including not only the collection, analysis and interpretation of such data, but also the planning of the collection of data, in terms of the design of surveys and experiments 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 Paweł Ciompa in 1910, Ragnar Frisch is given credit for coining the term in the sense that it is used today.^[2]

While many econometric methods represent applications of standard statistical models A statistical model is a set of mathematical equations which describe the behavior of an object of study in terms of random variables and their associated probability distributions. If the model has only one equation it is called a single-equation model, whereas if it has more than one equation, it is known as a multiple-equation model, there are some special features of economic data Economic data are usually numerical time-series, i.e., sets of data for part or all of a single economy or the international economy. When they are time-series the data sets are usually monthly but can be quarterly and annual. The data may be adjusted in various ways (for ease of further analysis), most commonly adjusted or unadjusted for seasonal that distinguish econometrics from other branches of statistics. Economic data are generally observational In statistics, an observational study draws inferences about the possible effect of a treatment on subjects, where the assignment of subjects into a treated group versus a control group is outside the control of the investigator. This is in contrast with controlled experiments, such as randomized controlled trials, where each subject is randomly, rather than being derived from controlled experiments Experiments is the step in the scientific method that arbitrates between competing models or hypotheses. Experimentation is also used to test existing theories or new hypotheses in order to support them or disprove them. An experiment or test can be carried out using the scientific method to answer a question or investigate a problem. First an. Because the individual units in an economy interact with each other, the observed data tend to reflect complex economic equilibrium In economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the values of economic variables will not change. It is the point at which quantity demanded and quantity supplied are equal. Market equilibrium, for example, refers to a condition where a market price is conditions rather than simple behavioral relationships based on preferences In psychology, preferences could be conceived of as an individual’s attitude towards a set of objects, typically reflected in an explicit decision-making process . Alternatively, one could interpret the term “preference” to mean evaluative judgment in the sense of liking or disliking an object (e.g., Scherer, 2005) which is the most typical or technology In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs. This function is an assumed technological relationship, based on the current state of engineering knowledge; it does not represent the result of economic choices, but. Consequently, the field of econometrics has developed methods for identification Consider a linear model for the supply and demand of some specific good. The quantity of the demand varies inversely with the price: a higher price decreases demand. The quantity of the supply varies directly with the price: a higher price makes supply more profitable and estimation Estimation theory is a branch of statistics and signal processing that deals with estimating the values of parameters based on measured/empirical data. The parameters describe an underlying physical setting in such a way that the value of the parameters affects the distribution of the measured data. An estimator attempts to approximate the unknown of simultaneous equation models Simultaneous equation methods have been used in econometrics to take account of the fact that economic variables such as prices and quantities are, in general, jointly determined in market equilibrium. Important examples include instrumental variables, two-stage least squares, three-stage least squares and seemingly unrelated regression models. These methods allow researchers to make causal inferences in the absence of controlled experiments.

Purpose

The two main purposes of econometrics are to give empirical In philosophy, empiricism is a theory of knowledge that asserts that knowledge arises from evidence gathered via sense experience. Empiricism is one of several competing views that predominate in the study of human knowledge, known as epistemology. Empiricism emphasizes the role of experience and evidence, especially sensory perception, in the content to economic theory and to subject economic theory to potentially falsifying tests.^[2]

For example, consider one of the basic relationships in economics: the relationship between the price of a commodity and the quantities of that commodity that people wish to purchase at each price (the demand Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity relationship). According to economic theory, an increase in the price would lead to a decrease in the quantity demanded, holding other relevant variables constant to isolate the relationship of interest. A mathematical equation can be written that describes the relationship between quantity, price, other demand variables like income, and a random term ε to reflect simplification and imprecision of the theoretical model:

Regression analysis In statistics, regression analysis includes any techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps us understand how the typical value of the dependent variable changes when any one of the could be used to estimate the unknown parameters β₀, β₁, and β₂ in the relationship, using data on price, income, and quantity. The model could then be tested for statistical significance In statistics, a result is called statistically significant if it is unlikely to have occurred by chance. The phrase test of significance was coined by Ronald Fisher as to whether an increase in price is associated with a decrease in the quantity, as hypothesized A statistical hypothesis test is a method of making statistical decisions using experimental data. In statistics, a result is called statistically significant if it is unlikely to have occurred by chance. The phrase "test of significance" was coined by Ronald Fisher: "Critical tests of this kind may be called tests of significance,: β₁ < 0.

There are complications even in this simple example, and it is often easy to mistake statistical significance with economic significance. Statistical significance is neither necessary nor sufficient for economic significance.^[3] In order to estimate the theoretical demand relationship, the observations in the data set must be price and quantity pairs that are collected along a demand schedule that is stable. If those assumptions are not satisfied, a more sophisticated model or econometric method may be necessary to derive reliable estimates and tests.

Methods

One of the fundamental statistical methods used by econometricians is regression analysis In statistics, regression analysis includes any techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps us understand how the typical value of the dependent variable changes when any one of the. For an overview of a linear implementation of this framework, see linear regression In statistics, linear regression is any approach to modeling the relationship between a scalar variable y and one or more variables denoted X. In linear regression, models of the unknown parameters are estimated from the data using linear functions. Such models are called “linear models.” Most commonly, linear regression refers to a model in. Regression methods are important in econometrics because economists typically cannot use controlled experiments Experiments is the step in the scientific method that arbitrates between competing models or hypotheses. Experimentation is also used to test existing theories or new hypotheses in order to support them or disprove them. An experiment or test can be carried out using the scientific method to answer a question or investigate a problem. First an. Econometricians often seek illuminating natural experiments A natural experiment is a naturally occurring instance of an observable phenomenon which approximates or duplicates the properties of a controlled experiment. In contrast to laboratory experiments, these events are not created or directly controlled by scientists. However, they can yield data that can be used to make causal inferences . Natural in the absence of evidence from controlled experiments. Observational data may be subject to omitted-variable bias In statistics, omitted-variable bias is the bias that appears in estimates of parameters in a regression analysis when the assumed specification is incorrect, in that it omits an independent variable (possibly non-delineated) that should be in the model and a list of other problems that must be addressed using causal analysis of simultaneous equation models.^[4]

Data sets A data set is a collection of data, usually presented in tabular form. Each column represents a particular variable. Each row corresponds to a given member of the data set in question. Its values for each of the variables, such as height and weight of an object or values of random numbers. Each value is known as a datum. The data set may comprise to which econometric analyses are applied can be classified as time-series data, cross-sectional data Cross-sectional data or cross section in statistics and econometrics is a type of one-dimensional data set. Cross-sectional data refers to data collected by observing many subjects (such as individuals, firms or countries/regions) at the same point of time, or without regard to differences in time. Analysis of cross-sectional data usually consists, panel data In statistics and econometrics, the term panel data refers to multi-dimensional data. Panel data contains observations on multiple phenomena observed over multiple time periods for the same firms or individuals, 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 modeled. Single equation methods model a single variable (the dependent variable The terms "dependent variable" and "independent variable" are used in similar but subtly different ways in mathematics and statistics as part of the standard terminology in those subjects. They are used to distinguish between two types of quantities being considered, separating them into those available at the start of a) 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 Simultaneous equation methods have been used in econometrics to take account of the fact that economic variables such as prices and quantities are, in general, jointly determined in market equilibrium. Important examples include instrumental variables, two-stage least squares, three-stage least squares and seemingly unrelated regression models 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 Labour economics seeks to understand the functioning and dynamics of the market for labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services , the demanders of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and is:

Economic theory says that the natural logarithm of a person's wage is a linear function of (among other things) the number of years of education that person has acquired. The parameter β₁ measures the increase in the natural log of the wage attributable to one more year of education. The term ε is a random variable representing all other factors that may have direct influence on wage. The econometric goal is to estimate the parameters, β₀ and β₁ under specific assumptions about the random variable ε. For example, if ε is uncorrelated with years of education, then the equation can be estimated with ordinary least squares In statistics, linear regression is any approach to modeling the relationship between a scalar variable y and one or more variables denoted X. In linear regression, models of the unknown parameters are estimated from the data using linear functions. Such models are called “linear models.” Most commonly, linear regression refers to a model in.

If the researcher could randomly assign people to different levels of education, the data set thus generated would allow estimation of 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 born in certain places may have higher wages and higher levels of education. Unless the econometrician controls for place of birth in the above equation, the effect of birthplace on wages may be falsely attributed to the effect of education on wages.

The most obvious way to control for birthplace is to include a measure of the effect of birthplace in the equation above. Exclusion of birthplace, together with the assumption that ε is uncorrelated with education produces a misspecified model. A second technique for dealing with omitted variables is instrumental variables estimation. Still a third technique is to include in the equation additional set of measured covariates which are not instrumental variables, yet render β₁ identifiable^[5]. An overview of econometric methods used to study this problem can be found in Card (1999).^[6]

Notable econometricians

The following are the Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics , is an award for outstanding contributions to the science of economics and is generally considered one of the most prestigious awards for that science. The official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( recipients in the field of econometrics:

• Jan Tinbergen Jan Tinbergen , Dutch economist, was awarded the first Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel during 1969, which he shared with Ragnar Frisch for having developed and applied dynamic models for the analysis of economic processes. Tinbergen was a founding trustee of Economists for Peace and Security, former Professor at the Erasmus University Rotterdam Erasmus University Rotterdam is a university in the Netherlands, located in Rotterdam. The university is named after Desiderius Erasmus Roterodamus, a 15th century humanist and theologian. The university has seven faculties and focuses on three domains, and Ragnar Frisch Ragnar Anton Kittil Frisch was a Norwegian economist and the co-winner with Jan Tinbergen of the first Nobel Memorial Prize in Economic Sciences in 1969 were awarded the first prize in 1969 for having developed and applied dynamic models for the analysis of economic processes.
• Lawrence Klein Lawrence Robert Klein is an American economist. For his work in creating computer models to forecast economic trends in the field of econometrics at the Wharton School of the University of Pennsylvania, he was awarded the Nobel Memorial Prize in Economic Sciences in 1980. Specifically "for the creation of economic models and their application, Professor of Economics at the University of Pennsylvania The University of Pennsylvania is a private research university located in Philadelphia, Pennsylvania, USA. Penn is the fourth-oldest institution of higher education in the United States, and is one of several institutions that claims to have been the first university in America. Penn is a member of the Ivy League and is one of the Colonial, was awarded in 1980 for his computer modeling work in the field.
• Trygve Haavelmo Trygve Magnus Haavelmo was an economist with main research interests centered on the fields of econometrics and economics theory. During World War II he worked with Nortraship in the Statistical Department in New York City. He received his Ph.D. in 1946 for his work on the "probability approach in econometrics" (1944). He was awarded the was awarded the Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, commonly referred to as the Nobel Prize in Economics , is an award for outstanding contributions to the science of economics and is generally considered one of the most prestigious awards for that science. The official name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( in 1989. His main contribution to econometrics was his 1944 article (published in Econometrica Econometrica is an academic journal of economics, publishing articles not only in econometrics but in many areas of economics. It is published by the Econometric Society and distributed by Wiley-Blackwell. Econometrica is one of the most highly ranked economics journals in the world The current editor of Econometrica is Stephen Morris, Alexander) "The Probability Approach to Econometrics."
• Daniel McFadden and James Heckman were awarded in 2000 for their work in microeconometrics. McFadden founded the econometrics lab at the University of California, Berkeley The University of California, Berkeley , is a public research university located in Berkeley, California, United States. The oldest of the ten major campuses affiliated with the University of California, Berkeley offers some 300 undergraduate and graduate degree programs in a wide range of disciplines. The university occupies 6,651 acres (2,692 ha).
• Robert Engle at the University of California, San Diego The University of California, San Diego is a public research university located in La Jolla, San Diego, California. UCSD is one of the ten general campuses of the University of California system and was founded in 1960 near the pre-existing Scripps Institution of Oceanography. 22,048 undergraduate and 5,073 graduate students enrolled in Fall 2007, and Clive Granger, at the University of Nottingham The University of Nottingham is a public research university in the city of Nottingham in England, with further campuses in Ningbo, China and Kuala Lumpur, Malaysia. The university was founded in 1881, and is a member of the Russell Group, the Sutton Trust 13, Universitas 21, the Association of Commonwealth Universities, and the European, were awarded in 2003 for work on analyzing economic time series. Engle pioneered the method of autoregressive conditional heteroskedasticity In econometrics, a model featuring autoregressive conditional heteroskedasticity considers the variance of the current error term or innovation to be a function of the actual sizes of the previous time periods' error terms: often the variance is related to the squares of the previous innovations. Such models are often called ARCH models , although (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 Econometrica is an academic journal of economics, publishing articles not only in econometrics but in many areas of economics. It is published by the Econometric Society and distributed by Wiley-Blackwell. Econometrica is one of the most highly ranked economics journals in the world The current editor of Econometrica is Stephen Morris, Alexander, the Journal of Econometrics, the Review of Economics and Statistics, the Econometric Theory, the Journal of Applied Econometrics, the Econometric Reviews, the Econometrics Journal, Applied Econometrics and International Development, the Journal of Business and Economic Statistics and the *Journal of Economic and Social Measurement.

Related universities

• Erasmus University Rotterdam Erasmus University Rotterdam is a university in the Netherlands, located in Rotterdam. The university is named after Desiderius Erasmus Roterodamus, a 15th century humanist and theologian. The university has seven faculties and focuses on three domains - Econometric Institute

Software

• EViews
• Gretl gretl is an open-source statistical package, mainly for econometrics. The name is an acronym for Gnu Regression, Econometrics and Time-series Library. It has a graphical user interface and can be used together with X-12-ARIMA, TRAMO/SEATS, R, Octave, and Ox. It is written in C, uses GTK as widget toolkit for creating its GUI, and uses gnuplot for
• OxMetrics OxMetrics is an econometric software including the Ox programming language for econometrics and statistics, developed by Jurgen Doornik and David Hendry. OxMetrics originates from PcGive, one of the first econometric software for personal computers, initiated by David Hendry in the 1980s at the London School of Economics
• SHAZAM
• Stata Stata is a general-purpose statistical software package created in 1985 by StataCorp. It is used by many businesses and academic institutions around the world. Most of its users work in research, especially in the fields of economics, sociology, political science, and epidemiology
• TSP
• R In computing, R is a programming language and software environment for statistical computing and graphics. It is an implementation of the S programming language with lexical scoping semantics inspired by Scheme. R was created by Ross Ihaka and Robert Gentleman at the University of Auckland, New Zealand, and is now developed by the R Development
• PSPP
• SAS
• SPSS

• Comparison of statistical packages

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