01 Intro

What is Econometrics?¶

How do we test economic theories are true using real-world data, using statistics.

Types of Data¶

Why Econometrics?¶

Monetary Policy¶

Policy that deals with finances of a country; most importantly, the money supply.

Currency¶

is just a medium of exchange.

It eliminates the need for ‘coincidence of wants’- that both parties agree to trade the exact goods and services which the other party also wants.

Rationality¶

Decisions taken in order to maximize self-interest and happiness.

Banking¶

Central bank regulates interest rates through rapport rate.

In order to increase interest rate, (i think this missing part is central bank would increase rapport rate)

Rapport Rate¶

Rate at which central banks lends to commercial banks

Interest Rate¶

Rate at which commercial banks lends to the public.

Theory¶

• Inflation \(\propto\) Money Supply \(\propto\) \(\frac{1}{\text{Interest Rate}}\)
• Interest Rate \(\propto\) Rapport Rate

However, this may not always be true

1. Interest Rate \(\not \propto\) Rapport Rate Commericial banks may not follow the same as central bank, if they have high liquidity (lots of hot cash)
2. Inflation \(\not \propto \frac{1}{\text{Interest Rate}}\) People may not always spend more just because of higher money supply caused by lower interest rates

Type of Relationships¶

• One-way
• Simultaneous

Problems¶

Noise¶

Randomness due to nature of the real world.

Heteroskedasticity¶

Variance in distribution of possible outcomes will change over different time, location, settings.

This is the biggest problem when using observational data, rather than experimental data.

Auto-Correlation¶

Tendency of a variable to be determined by its own past values.

Mostly happens in time-series.

Overnight/Call Money Market¶

Short-term lending from central bank to commercial banks.

These interest rates are called call money rate. It will be different from the regular loans, and will change regularly.

An interbank call money market is a short-term money market which allows for large financial institutions to borrow and lend money at interbank rates. The loans in the call money market are very short, usually lasting no longer than a week.

Random Variable¶

Numerical outcome of a random event

There are multiple outcomes possible, and there exists an underlying probability distribution. Hence, for each possible outcome, there exists a corresponding probability.

2 random variables cannot perfectly correlated; otherwise it has some cause.

Systematic Event¶

only one outcome is possible

\(P(A)=1; P(A')=0\)

numerical outcome of a systematic event is systematic variable

Africa Case Study¶

People were dying due to malaria and dengue, as they were not having access proper shelter from the mosquitos.

The first idea was to increase their income, by proving them direct income transfer, because they would use that money to take care of themselves.

2 researchers at MIT studied these African Countries. These 2 researchers disagreed.

There were 2 communities

• One community was given direct income transfers
• One community was given nets

Giving nets was more effective, as the other community spent the money for other aspects such as food, baby requirements, purchasing books; they considered nets as a luxury.

Psychological Theory of Consumption¶

Proposed by John Maynard Keynes

Assuming Consumption \(\propto\) Income

• \(C\) is the total consumption
• \(c\) is the basic consumption
  • \(c \ne 0\)
• \(k\) is called the MPC (Marginal Propensity to Consume)
  • \(k \in [0, 1]\)
• \(I\) is the income

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