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319lec01_2010 - Lecture 01 Introduction to Econometrics...

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Lecture 01 Introduction to Econometrics ° Outline ° Features of Modern Economics? 1. modelling (math) 2. empirical veri°cation (statistics) ° Role of Quantitative Analysis 1. Role of Modeling 2. Role of Econometrics ° Limitations of Econometrics ° Conclusion 1
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I. What is Economics? ° What is Economics? ° Resource allocation in an uncertain environment ° Karl Marx: Study on production relationship ° Alfred Marshall: Study on human behavior in daily life ° Keynes divided Economics into three categories: ° Normative Economics: ° Positive Economics: ° Technical/Engineering-style (e.g., Econometrics): ° What is the mainstream Economics? ° Modern economics studies resource allocation in a market economy. ° Macroeconomics e.g., Rational Expectations, Business Cycles ° Microeconomics e.g., Game Theory ° Finance, e.g., Asset/derivative pricing, risk management ° Econometrics e.g., Cross-sectional econometrics Time series econometrics Microeconometrics (panel data analysis) 2
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II. Features of Modern Economics? ° General Methodology of Modern Economics: 1. Data collection and Summary of empirical stylized facts; ± Stylized facts are often summarized from economic data. e.g., Phillip²s curve: negative correlation between in³ation rate and unemployment rate. 2. Theory/modelling an in attempt to explain stylized facts; 3. Empirical veri°cation. ± Check whether theory/model can explain stylized facts and predict future patterns. 4. Applications. ° Modern economics has two important features: 1. Modelization/Mathematization ± Mathematical Economics e.g., General equilibrium theory: Whether multiple markets can achieve a competitive equilibrium. ± Mathematical Finance continuous-time calculus e.g., Black-Scholes formula for options pricing and Financial engineering 2. Empiricalization ± Any theory/model needs empirical veri°cation. ± New theory/model arise after empirical rejection of the existing theory/model. e.g., Positive-sloped Phillips curve in 1970s-1980s and macroeconomic theory of stag³a- tion ° e.g., Business cycles and new economy U.S. had the longest booming in the 1990s since WWII. ° Remark: Mathematization and empirical veri°cation arise from the e/ort of economists to make economics a "science". 3
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° What is science? ° Logical consistency and coherency in theory; ° Consistency between theory and stylized facts. 4
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MATHEMATIZATION AND MODELING ° First of all, there are many ways (e.g., verbal description, math) to describe economic theory. Math is just one of them. To ensure logical consistency of theory, there may not be necessary to use math. ° However, mathematics is well-known as the most rigorous logical language. ° Any theory, when it can be expressed by mathematical language, will indicate that it has achieved a sophisticated level.
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