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Dr. Yoke Muelgini, M.Sc. Jurusan Ekonomi dan Studi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung 2012 FEB Unila Course on ESP 434 Monetary.

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Presentation on theme: "Dr. Yoke Muelgini, M.Sc. Jurusan Ekonomi dan Studi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung 2012 FEB Unila Course on ESP 434 Monetary."— Presentation transcript:

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2 Dr. Yoke Muelgini, M.Sc. Jurusan Ekonomi dan Studi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung 2012 FEB Unila Course on ESP 434 Monetary Economics 1 Seminar The Recipe for a Successful Thesis in Applied Economics Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung Jurusan Ekonomi dan Studi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

3 2 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

4 3 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Abstract If you are the next Paul Samuelson and will wholly transform the field of economics, pay no heed. If you are the next Ken Arrow or Robert Lucas J and will invent a new branch of economics, these notes are not for you. This paper provides tips of things to think of when writing a script or a thesis or a dissertation in applied economics. One of the most important ingredients in the recipe for success is to get an early start, and to begin looking for data as soon as possible. Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

5 4 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

6 5 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 1 Introduction What is “research”? The traditional view is that research is “the search for knowledge,” which reflects the idea that science should be completely objective. The researcher simply collects the data, which then “speak for themselves.” Figurly speaking, knowledge is fruit on a tree in the forrest, and all the researcher needs to do is to discover the tree and collect the knowledge (Greenlaw, 2006). Of course, this is not entirely true. What is missing here is a distinction between knowledge and facts. Knowledge is our common understanding of how things work, and if we do not know exactly, it is our best guess. Facts, on the other hand, are just data. In other words, knowledge is facts with meaning; it is the researcher’s best interpretation of the facts, and research is the creation of such knowledge. Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

7 6 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 1 Introduction Knowledge is a dialog between researchers as they strive to strengthen their interpretations of the facts. Through this dialog weaker interpretations, or arguments, are gradually abandoned, while the stronger ones are refined and made even better. Weaker arguments are those with less supporting evidence. Since the data are also the facts, having weak support means that the argument does not fit the facts and that it must be flawed in one way or another. Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

8 7 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 2 Getting started The following items are crucial when starting up a new thesis project: 1.Choosing your topic 2.Do your econometric approach that fits the problem and that can be used to test the hypothesis of interest. 3.Write Your Research Report Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

9 8 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 2 Getting started It is important to begin thinking about these items right away, before you begin the actual thesis work, so that once you begin you know what to do. Do not just start to think about the question. Research is a highly nonlinear process that must be carried out in an iterative, rather than a step- wise, fashion. For example, although you need to begin to think about the topic (step 1) and question (step 2) early, you also need to think about the availability of data (step 4). If there are no data, then you can just as well start looking for something else. In fact, as soon as you have just a partial idea of what to do you should begin to look for data. Similarly, in formulating the hypothesis (step 3), you need to know what kind of data you have (step 4). Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

10 9 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 2 Getting started 1.Choosing your topic There are at least three keys to choosing a topic: 1. Try to pick a field that you find interesting and/or that you know something about 2. Make sure that data are readily available with a reasonable sample (we suggest at least 25 observations) 3. Make sure that there is some substance to your topic – Avoid topics that are purely descriptive or virtually tautological in nature – Instead, look for topics that address an inherently interesting economic or behavioral question or choice Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

11 10 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Choosing Your Topic 1. Choosing your topic (cont.) Places to look: – Your textbooks and notes from previous economics classes – Economics journals For example, Table 11.1 contains a list of the journals cited so far in this textbook (in order of the frequency of citation) Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

12 11 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

13 12 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 11.1a Sources of Potential Topic Ideas Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

14 13 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 11.1a Sources of Potential Topic Ideas (cont.) Table 11.1a Sources of Potential Topic Ideas Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

15 14 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 2 Getting started The following items are crucial when starting up a new thesis project: 1.Choosing your topic 2.Do your econometric approach that fits the problem and that can be used to test the hypothesis of interest. 3.Write Your Research Report Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

16 15 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Steps in Applied Regression Analysis The first step is choosing the dependent variable – this step is determined by the purpose of the research (see Chapter 11 for details) After choosing the dependent variable, it’s logical to follow the following sequence: 1. Review the literature and develop the theoretical model 2. Specify the model: Select the independent variables and the functional form 3. Hypothesize the expected signs of the coefficients 4. Collect the data. Inspect and clean the data 5. Estimate and evaluate the equation 6. Document the results Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

17 16 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 1: Review the Literature and Develop the Theoretical Model Perhaps counter intuitively, a strong theoretical foundation is the best start for any empirical project Reason: main econometric decisions are determined by the underlying theoretical model Useful starting points: – Journal of Economic Literature or a business oriented publication of abstracts – Internet search, including Google Scholar – EconLit, an electronic bibliography of economics literature (for more details go to www.EconLit.org) Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

18 17 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

19 18 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 2: Specify the Model: Independent Variables and Functional Form After selecting the dependent variable, the specification of a model involves choosing the following components: 1. the independent variables and how they should be measured, 2. the functional (mathematical) form of the variables, and 3. the properties of the stochastic error term

20 19 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 2: Specify the Model: Independent Variables and Functional Form (cont.) A mistake in any of the three elements results in a specification error For example, only theoretically relevant explanatory variables should be included Even so, researchers frequently have to make choices –also denoted imposing their priors Example: when estimating a demand equation, theory informs us that prices of complements and substitutes of the good in question are important explanatory variables But which complements—and which substitutes?

21 20 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 2: Specify the Model: Independent Variables and Functional Form (cont.) Once the variables are selected, it’s important to hypothesize the expected signs of the regression coefficients Example: demand equation for a final consumption good First, state the demand equation as a general function: (3.2) The signs above the variables indicate the hypothesized sign of the respective regression coefficient in a linear model.

22 21 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 4: Collect the Data & Inspect and Clean the Data A general rule regarding sample size is “the more observations the better” as long as the observations are from the same general population! The reason for this goes back to notion of degrees of freedom (mentioned first in Section 2.4) When there are more degrees of freedom: Every positive error is likely to be balanced by a negative error (see Figure 3.2) The estimated regression coefficients are estimated with a Precision

23 22 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

24 23 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Figure 3.1 Mathematical Fit of a Line to Two Points

25 24 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Figure 3.2 Statistical Fit of a Line to Three Points

26 25 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 4: Collect the Data & Inspect and Clean the Data (vcont.) Estimate model using the data in Table 2.2 to get: Inspecting the data—obtain a printout or plot (graph) of the data Reason: to look for outliers – An outlier is an observation that lies outside the range of the rest of the observations Examples: – Does a student have a 7.0 GPA on a 4.0 scale? – Is consumption negative?

27 26 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 5: Estimate and Evaluate the Equation Once steps 1–4 have been completed, the estimation part is quick – using Eviews or Stata to estimate an OLS regression takes less than a second! The evaluation part is more tricky, however, involving answering the following questions: – How well did the equation fit the data? – Were the signs and magnitudes of the estimated coefficients as expected? Afterwards may add sensitivity analysis (see Section 6.4 for details)

28 27 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 6: Document the Results A standard format usually is used to present estimated regression results: (3.3) The number in parentheses under the estimated coefficient is the estimated standard error of the estimated coefficient, and the t-value is the one used to test the hypothesis that the true value of the coefficient is different from zero on (more this later!)

29 28 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 2 Getting started The following items are crucial when starting up a new thesis project: 1.Choosing your topic 2.Do your econometric approach that fits the problem and that can be used to test the hypothesis of interest. 3.Write Your Research Report Department of Economics and Development Studies, Faculty of Economics and business, University of Lampung Jurusan Ekonomi Pembangunan Fakultas Ekonomi dan Bisnis Universitas Lampung

30 29 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Writing Your Research Report Most good research reports have a number of elements in common: – A brief introduction that defines the dependent variable and states the goals of the research – A short review of relevant previous literature and research – An explanation of the specification of the equation (model): Independent variables functional forms expected signs of (or other hypotheses about) the slope coefficients – A description of the data: generated variables data sources data irregularities (if any)

31 30 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Writing Your Research Report A presentation of each estimated specification, using our standard documentation format – If you estimate more than one specification, be sure to explain which one is best (and why!) A careful analysis of the regression results: – discussion of any econometric problems encountered – complete documentation of all: equations estimated tests run A short summary/conclusion that includes any policy recommendations or suggestions for further research A bibliography An appendix that includes all data, all regression runs, and all relevant computer output

32 31 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Case Study: Using Regression Analysis to Pick Restaurant Locations Background: You have been hired to determine the best location for the next Woody’s restaurant (a moderately priced, 24- hour, family restaurant chain) Objective: How to decide location using the six basic steps of applied regression analysis, discussed earlier?

33 32 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 1: Review the Literature and Develop the Theoretical Model Background reading about the restaurant industry Talking to various experts within the firm – All the chain’s restaurants are identical and located in suburban, retail, or residential environments – So, lack of variation in potential explanatory variables to help determine location – Number of customers most important for locational decision Dependent variable: number of customers (measured by the number of checks or bills)

34 33 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 2: Specify the Model: Independent Variables and Functional Form More discussions with in-house experts reveal three major determinants of sales: – Number of people living near the location – General income level of the location – Number of direct competitors near the location

35 34 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 2: Specify the Model: Independent Variables and Functional Form Based on this, the exact definitions of the independent variables you decide to include are: – N = Competition: the number of direct competitors within a two mile radius of the Woody’s location – P = Population: the number of people living within a three-mile radius of the location – I = Income: the average household income of the population measured in variable P With no reason to suspect anything other than linear functional form and a typical stochastic error term, that’s what you decide to use

36 35 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 3: Hypothesize the Expected Signs of the Coefficients After talking some more with the in-house experts and thinking some more, you come up with the following: (3.4)

37 36 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 4: Collect the Data & Inspect and Clean the Data You manage to obtain data on the dependent and independent variables for all 33 Woody’s restaurants Next, you inspect the data The data quality is judged as excellent because: Each manager measures each variable identically All restaurants are included in the sample All information is from the same year The resulting data is as given in Tables 3.1 and 3.3 in the book ( using Eviews and Stata, respectively)

38 37 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 5: Estimate and Evaluate the Equation You take the data set and enter it into the computer You then run an OLS regression (after thinking the model over one last time!) The resulting model is: (3.5) Estimated coefficients are as expected and the fit is reasonable Values for N, P, and I for each potential new location are then obtained and plugged into (3.5) to predict Y

39 38 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Step 6: Document the Results The results summarized in Equation 3.5 meet our documentation requirements Hence, you decide that there’s no need to take this step any further

40 39 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

41 40 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.1a Data for the Woody’s Restaurants Example (Using the Eviews Program)

42 41 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.1b Data for the Woody’s Restaurants Example (Using the Eviews Program)

43 42 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.1a Data for the Woody’s Restaurants Example (Using the Eviews Program)

44 43 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.2a Data for the Woody’s Restaurants Example (Using the Eviews Program)

45 44 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.2b Data for the Woody’s Restaurants Example (Using the Eviews Program)

46 45 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.3 Data for the Woody’s Restaurants Example (Using the Eviews Program)

47 46 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.3b Data for the Woody’s Restaurants Example (Using the Eviews Program)

48 47 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.4a Data for the Woody’s Restaurants Example (Using the Eviews Program)

49 48 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Table 3.4b Data for the Woody’s Restaurants Example (Using the Eviews Program)

50 49 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Key Terms from Lecture 04 The six steps in applied regression analysis Dummy variable Cross-sectional data set Specification error Degrees of freedom

51 50 Figure 5.3 “Acceptance” and Rejection Regions for a One-Sided Test of β © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 Department of Economics and Development Studies, Faculty of Economics and Business, University of Lampung

52 51 © Dr. Yoke Muelgini, M.Sc. FEB Unila, 2012 The End of Lecture 3 Practice Makes Perfect: Why don’t You do it ? Learning to Use Regression Analysis


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