Duke University - Department of Economics - Fall 2008 Economics 139D/239D: Introductory Econometrics September 3, 2008 This course introduces students to the statistical tools that economists use to test models, evaluate quantitatively policy changes, learn about economic behavior, and more generally study the relation between variables. The goal is to learn enough theory and get enough practice to be able to do some simple but sensible data analysis on your own. Also, we will insist on the *motivations* guiding the use of different econometric tools. Why should we use a tool instead of another? What are the assumptions needed for each of these tools to work well? We will see many real-life applications, but this course is, above all, an introduction to econometric TECHNIQUES, which means that there will be a LOT of algebra and statistics to go through. Unfortunately, technicalities ARE necessary to discriminate between sound analysis and descriptive accounts (sometimes interesting, too often sloppy and superficial). The course will also introduce students to the use of STATA, a powerful and widely used statistical package that can be used for both very simple and very complex applied work. Several problem sets will involve data analysis with STATA using actual data. A good working knowledge of probability theory, statistics, and calculus is necessary for this course. Prerequisites: Econ 55D, Math 32 and Stats 103. Lectures: Instructor: Tu Th 8:30 AM - 9:45 AM (Social Sci 139) Alessandro Tarozzi - taroz@econ.duke.edu Office hours: in 202 Social Sciences, Monday 8PM-10PM. Teaching assistants: E-mail Office hours Anumeha Goel anumeha.goel@duke.edu Geoffrey Yih Eric Pince Andrew Lee g.yih@duke.edu eric.pince@duke.edu andrew.lee@duke.edu Thursday Friday Wednesday Thursday 1:00PM-2:30PM 11:30AM-1:00PM noon-2PM 10AM-noon SocSci 105 SocSci 107 SocSci 02A SocSci 02A Tuesday 4PM-6PM Old Chem 01 Sections: (all in Social Sciences 229) Tu Tu Tu W W W Th Location 11:55AM - 12:45PM 3:05PM - 3:55PM 4:40PM - 5:30PM 11:55AM - 12:45PM 1:30PM - 2:20PM 6:15PM - 7:05PM 4:40PM - 5:30PM Eric Andrew Geoff Anumeba Andrew Geoff Eric Handouts and grades will be available on the course’s web page (http://courses.duke.edu), so please check regularly the course web page for announcements and course material. Stock and Watson, “Introduction to Econometrics”, Second Edition Addison-Wesley, 2006, ISBN: 0321278879. Supplementary online material: http://wps.aw.com/aw_stock_ie_2. Required Textbook: Econometric Package: STATA, which is available on the computers in 229 Social Sciences as well as in the Basement (Room 01) of the Old Chem Building. If you wish, you can purchase your own copy of Intercooled Stata (see http://www.stata.com/order/new/edu/gradplan.html). The cost is $95 for a one-year license, and $155 for a perpetual license. See also http://www.socsci.duke.edu/it/compute/stata.html. Other textbooks for undergraduate econometrics courses (not required, just for your reference): Goldberger, “Introductory Econometrics”, Harvard University Press (Short, great for intuition, but requires a certain degree of confidence with the material to be appreciated); Wooldridge, “Introductory Econometrics: A Modern Approach”, South-Western College Publishing (excellent “standard” textbook, very widely used). In case you would like to have more advanced references (e.g. graduate-level textbook), just ask me! RULES, RULES, RULES!!!! It is your responsibility to read and understand the “rules of the game”. 1. GRADING: 1. Midterm 1 2. Midterm 2 3. Final (comprehensive) 35% 25% 40% The relative weight of each exam is fixed and with the exception indicated in point 2 below, under no circumstance will be changed. 2. There will be no makeup midterms, and there are NO exceptions to this rule. If you miss a midterm, and you can document that you have a good excuse for missing the midterm, the weight of the missed exam will be placed on the final. 3. All exams are comprehensive, so you will be responsible for all the material covered until the exam. 4. All exams will be closed books, but you will be allowed to use a “cheat sheet” that summarizes most results. 5. If you think that an exam should be re-graded, you have to submit in writing the detailed reasons why you think this is the case. Take into account that if you ask for re-grading, the whole exam will be checked again. You have to submit requests for midterms’ re-grading within two weeks from the day the exams are returned. 6. Class attendance is strongly encouraged, but it is not required. I know that 8:30AM is not a very “popular” time for an econometrics class, but 8:30AM is when we have been assigned to begin. It is distracting to have latecomers enter the room after class starts. If you plan to attend, please be in class on time. 7. There will be 6-8 problem sets, part pencil & paper, part to be solved using Stata. Problem sets are NOT mandatory and grades will NOT be recorded. However, you are strongly encouraged to turn in one or two exercises (no more than two) from each problem set, which will then be carefully graded (again, without recording the grade) and returned to you. This is a way for you to test your understanding of the material on problems that follow a format analogous to what you should expect on exam day (indeed most problem sets will be based on past exams), and to familiarize yourself with how your exams will be graded. You will see that partial credit is always granted for partial but meaningful answers, but full credit requires complete and rigorous reasoning. 8. For any problem related to Stata and problem sets you should talk to your TA. But please do use my office hours for everything related to the content of the course. If you have doubts about the materials, do not wait until a few hours before the exam! You are also welcome to use my office hours to discuss extra-material we do not discuss in class or any other matter related or unrelated to the course. ADVICE (free and disposable) 1. The whole course builds on what we will cover in the first three weeks of class. During these weeks, we will review important concepts from statistics and we will introduce a few ones which will likely be new to you. If you understand well this material, the rest of the course will be fairly straightforward. 2. Believe it or not, failing this course is exceedingly hard. If you work hard enough, you may be able to get a Cor less, but that’s not easy, and only few have succeeded in the past. The vast majority of you will most likely do better or much better than that. However, and more seriously, excellence is also hard to achieve and requires a good working knowledge of the econometric theory that we will cover in class. More than half of exam questions are usually empirical, but theory and proofs always account for part of the exam too. 3. In my experience, the best way to learn how to do understand theory and learn how to do proofs is to replicate independently the proofs we see in class and to solve independently problem sets and past exams (of which many will be posted on blackboard during the course). If you simply come to class and/or review your notes without checking whether you can replicate the crucial steps without looking at solutions you will likely find out on exam day that… you cannot replicate the crucial steps without looking at solutions. 4. Questions are welcome during class. Always keep in mind that if you are paying attention and you find that you are missing something in what I am saying, any or all of the following are likely to be true: 1. others in the class are as confused as you are; 2. The instructor has made a mistake; 3. The instructor has tragically mispronounced some words, or he has invented new words altogether in his goofy mental translation from Italian. 5. Just to re-iterate… use my and your TA office hours if you want to review material, and start doing so immediately if you feel lost! Course Outline The course outline is tentative (hopefully not too much). Please keep in mind that there will be NO MAKE-UP MIDTERMS, and that both midterms have been scheduled during class time, so please make sure you do not have other commitments on those dates. Part I - Statistics Review 1. Aug 26 Tu Introduction, course descriptions & “rules”. + A very brief & quick introduction to Stata: 2. Aug 28 Th Statistics review: (Ch. 2) random variables, continuous & discrete; probability function and CDF, expected value & variance. Relationship between two random variables: marginals, joint, conditional; 3. Sep 2 Tu Statistics review: (Ch. 2) law of iterated expectations (L.I.E.), Covariance, Independence, uncorrelation. What iid means; estimators & estimates; the sample mean. 4. Sep 4 Th Statistics review: (Ch. 2 & 3) properties of estimators; bias, variance (efficiency). 5. Sep 9 Tu Statistics review: (Ch. 2 & 3) Consistency, Asymptotic Normality; a simple Central Limit Theorem. 6. Sep 11 Th Statistics review: (Ch. 3) Tests and Confidence Intervals. Part II - Econometrics proper: the use of Ordinary Least Squares to study the causal relationship between different economic variables. 7. Sep 16 Tu Conditional expectations: why we care, and how to estimate them. Ordinary Least Squares with only one conditioning variable. Terminology & formulae. (Ch. 4) 8. Sep 18 Th The OLS assumptions & properties of the estimators: unbiasedness. OLS again, variance, and Asymptotic normality. (Ch. 4) 9. Sep 23 Tu Asymptotic normality. R-squared: what it is, and what it is not. (Ch. 4) 10. Sep 25 Th Applications. Tests and C.I. A simplifying assumption: homoskedasticity, its consequences, and the Gauss-Markov theorem (OLS is BLUE). (Ch. 5) 11. Sept 30 Tu OLS and nonlinearities, Dummy variables, interactions. (Ch. 5, 8) 12. Oct 2 Th 1st Midterm. (IN CLASS, DURING CLASS TIME) 13. Oct 7 Tu OLS in multivariate regressions. Multicollinearity. Omitted variable bias. (Ch. 6) 14. Oct 9 Th Properties of OLS with multiple regressors, R-squared, adjusted R-squared. Tests & C.I. Inference with multiple regression. Joint hypothesis. (Ch. 6, 7) Oct 14 Tu Fall Break Oct 16 Th Assessing Studies Based on Multiple Regression (Ch. 9) 15. Part III - Beyond OLS 16. Oct 21 Tu Nonlinearities again, and limited dependent variables. Linear Probability Model, logit and probit. (Ch. 8, 11) 17. Oct 23 Th Logit & Probit. How do we estimate the coefficients now? What about standard errors, R-squared and so on? Maximum Likelihood Estimation. (Ch. 11) 18. Oct 28 Tu MLE, and Regression with limited dependent variables at work. (Ch. 11) 19. Oct 30 Th MLE again, pseudo-R2. (Ch. 11) Nov 4 Tu 2nd Midterm. (IN CLASS, DURING CLASS TIME) 20. Nov 6 Th Analysis of panel data.(Ch. 10) 21. Nov 11 Tu When the regressors are endogenous: estimation using Instrumental Variables. (Ch. 12) 22. Nov 13 Th Instrumental variables. (Ch. 12) 23. Nov 18 Tu Instrumental variables. (Ch. 12, Ch. 13.7, Appendix 13.4) 24. Nov 20 Th TBA 25. Nov 25 Tu TBA Nov 27 Th Thanksgiving recess. 26. Dec 2 Tu TBA 27. Dec 4 Th Q&A Dec 13 Saturday 9:00AM – 12PM Final Examination