ECN-720/603

Econometric Methods-I/ Econometric Theory & Applications

School of Economics
International Institute of Islamic Economics

Dr Arshad Ali Bhatti

Spring, 2014

ECN-720/603: Econometric Methods-I/ Econometric

Theory & Applications
(Course outline and reading list)
Office hours: Open-door-policy until mentioned on the door slip.
Level: MS Eco./E&F/IBF
Class Room: TBA
Lectures: TBA
Objectives:

To develop an understanding of the use of regression analysis (at advance level)

and related techniques for quantifying economic relationships and testing
economic theories.
In addition to understanding the theoretical concepts behind regression analysis,
students should aim to develop the practical skills necessary for good data
analysis and interpretation of the results. Although, this will involve the use of the
computer, no previous experience is required.

Prerequisites:

Good knowledge of Matrix Algebra and Probability Theory.

Requirements:

Problem Sets/Quizzes :
Midterm
:
Final Exam
:

20%
20%
60%

Exams
There will be one midterm exam of 90 minutes during the second week of March, 2014.
There wont be any make-up exam for the absent students under any circumstances. A
three hour Final Exam will be conducted at the end of this semester.
Problem Sets:
The problem sets will be assigned roughly every two weeks. They will involve both
theoretical and empirical work. Joint work and free discussion are strongly encouraged.
However, every student should turn in his own work. They are extremely useful for
reviewing the course and preparing for the exams. Late assignments shall carry no
reward.

ECN-720/603

Econometric Methods-I/ Econometric Theory & Applications

Use of software:
Students will be introduced to the econometric software, EViews/ STATA, and be shown
how to apply the various estimation techniques and testing procedures in practice.
Postings:
Course materials (course outline, problem sets, data, additional readings etc.) will be
posted on www.ecopulsars.blogspot.com. You are advised to visit your course folder at
least once during a week.

Course Outline and Reading Guide

Readings:
The required textbooks for the course are:

Greene W. H., Econometric Analysis, Seventh Edition, 2012, Pearson Education

Inc., USA. {EA}

Verbeek, Marno, A Guide to Modern Econometrics, Fourth Edition, 2012, John Wiley
{GME}.

Johnston, J. and J. Dinardo, Econometric Methods, Fourth Edition, 1997,

McGraw-Hill. {EM}.

Heij, C., and others, Econometric Methods with Applications in Business and Economics,
2004, Oxford University Press {EMBE}.

Asteriou, Dimitrios, Applied Econometrics, 2007, Palgrave. {AE}

Students may consult the following recommended texts:

Thomas R. L., Introductory Econometrics: Theory & Applications, 2nd ed., 1995,
Longman Group Limited UK. {IE}
Judge George G., .., Introduction to Theory and Practice of Econometrics, 2nd ed.,
1988, John Wiley {ITPE}
Kmenta Jan, Elements of Econometrics, 2nd ed., 1971, Macmillan. {EE}

OUTLINE OF TOPICS:
1

Matrix Algebra Review:

Readings: Handout 1 and Appendix A (ITPE), A (EM)

The Multivariate Linear Regression Model:

Basic assumptions, OLS Estimation, Statistical properties of least squares
estimators; Gauss-Markov Theorem (opt), Geometry of Least Squares (opt), Tests
of linear restrictions, the F-test / the Wald test, Restricted least squares.
Applications.
Readings:

Ch 3, 3.1, 3.3, 3.4, 3.5 and Appendix to Ch 3, Sections 3.4 (EM),

Ch 5 (ITPE)
Ch 2, 3, 4, 6.3 (EA)

ECN-720/603
3

Regression Function Specification:

Specification Error, Tests of parameter constancy, Tests of structural change,
Omission of relevant variables, Inclusion of irrelevant variables, Binary variables,
Non-linearity in the variables.
Readings:

Ch 6, 6.16.3, 6.4-6.8, 6.9 (EM)

Ch 11, 12 (EA)
Ch 9 (ITPE)

Univariate Time Series Modeling:

Structural Models Vs Time Series Models, Random Walk Processes, Stationary &
Non-stationary time series, The Autocorrelation Function (ACF), Homogeneous
Non-Stationary Processes, Testing for Random Walk/ Unit Roots, Cointegration.
Applications.
Readings:

Ch 5; 5.5 (EM)
Ch 5; 5.4 --5.6 (EA)
Ch 5 (IE)

Heteroskedasticity and Autocorrelation:

Nature of the problems, Reasons, Consequences, Testing, Estimation,
Forecasting. Applications.
Readings:

Ch 5, 5.1--5.4, (EM)
Ch 17 (EA)
Ch 6 (ITPE)

Measurement Error and Instrument Variables:

Stochastic explanatory variables, Breakdown of CLRM assumption, Error of
measurement, Instrument variables (IV), IV-estimation, Choice of IVs, WuHausman Test, 2SLS. Application: Model of Public Spending.
Readings:

Ch 4; 4.1, 4.2, 4.3.1, 4.3.3, 4.3.6, 4.5, 4.6 (EM)

Ch 7 (EA)
Ch 11 (EE)

Maximum Likelihood Estimation:

Properties of MLE estimators, Estimation, Likelihood Ratio (LR) Test, Wald (W)
Test, Lagrange Multiplier (LM) Test, ML estimation of the linear model with
non-spherical disturbances (GLS).
Readings:

Econometric Methods-I/ Econometric Theory & Applications

Handout, Ch 2, 2.5, Ch 7, Ch 8, 8.4.2 (EM)

Ch 20 (EA)

Simultaneous Equations:
Seemingly Unrelated Regression (SUR), Structural form and Reduced form,
Simultaneous equation bias, Identification: order and rank conditions, Estimation
by least squares, indirect least squares (ILS), instrumental variables(IV), twostage least squares(2SLS), three-stage least squares(3SLS). Applications.
Readings:

Ch 9, 9.4-9.6, and the Appendix to Ch 9, 9.1. (EM)

Ch 11, 11.2, Ch 14, 15 (ITPE)
Ch 15 (EA)

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Econometric Methods-I/ Econometric Theory & Applications

Generalized Method of Moments (GMM):

The method of moments (MOM), OLS as a moment problem, IV as a moment
problem, GMM and orthogonality condition, Distribution of the GMM estimator,
Applications.
Readings:

Handout, Ch 2, 2.5, Ch 7, Ch 8, 8.4.2 (EM)

Ch 18 (EA)

This outline is tentative. Changes may be announced in the class.