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Enjoyable Econometrics
www.cambridge.org
Information on this title: www.cambridge.org/9781107164611
DOI: 10.1017/9781316691137
© Philip Hans Franses 2018
This publication is in copyright. Subject to statutory exception
and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.
First published 2018
Printed in the United Kingdom by Clays Ltd.
A catalogue record for this publication is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Names: Franses, Philip Hans, 1963– author.
Title: Enjoyable econometrics / Philip Hans Franses.
Description: 1 Edition. | New York : Cambridge University Press, 2018. | Includes
bibliographical references and index.
Identifiers: LCCN 2018018449 | ISBN 9781107164611 (hardback)
Subjects: LCSH: Econometrics. | Econometrics – Popular works.
Classification: LCC HB139 .F7224 2018 | DDC 330.01/5195–dc23
LC record available at https://lccn.loc.gov/2018018449
ISBN 978-1-107-16461-1 Hardback
ISBN 978-1-316-61647-5 Paperback
Cambridge University Press has no responsibility for the persistence or accuracy of
URLs for external or third-party internet websites referred to in this publication
and does not guarantee that any content on such websites is, or will remain,
accurate or appropriate.
To find your true path, you must be as free as possible to cast
adrift.
—Francis Bacon (painter)
Contents
Preface page ix
1 Introduction 1
3 Money 53
Notes 260
Index 280
vii
Preface
ix
x preface
history
thanks
A first word of thanks is to the editorial team of Cambridge University
Press. Phil Good has been very helpful in encouraging and in govern-
ing the publication process.
I am also thankful to the students who helped me with the data
collection; in particular, I would like to mention Wouter Knecht, Bert
de Bruijn, Stephanie Vermeer, Lotje Kruithof, Merel van Diepen,
Rogier Potter van Loon, Marjolein van Baardwijk, and Jeanine Kippers.
A special word of thanks goes to Eva Janssens for checking all
the computations and her help with the website and to Christiaan Heij
for his keen eye on the equations.
Since 2006, I have served as Dean of the Erasmus School of
Economics, a school with more than 6,000 bachelors and masters
students in economics and econometrics. Usually, when someone
becomes a dean, his or her research output will vaporize quickly, as
the administrative duties require much time. I was lucky though, in
the past years, to have a wonderful team to help me lead the school,
which made it possible for me to have some spare moments to work on
this book. I therefore conclude these words of thanks by expressing my
enormous gratitude to Harry Commandeur, Saskia Krijger,
Margaretha Buurman, Nine van Gent-van der Feltz, Bert de Groot,
Ben Schotpoort, Reino de Boer, Ivo Arnold, Casper de Vries, Shirley
May, Ylaise Herwig-Djojokarso, Ellen Baaij-van der Hoven, Ronald de
Groot, Charles Hermans, and of course Tineke Kurtz-Wierenga, who
has been my wonderful personal assistant for many years. Without all
of you, this book could never have been completed.
1 Introduction
—Aristotle
at a glance
This book deals with applications of econometric methods and tech-
niques to a variety of questions, often and on purpose outside the
realm of economics. Usually, econometric methods are considered
for questions in macroeconomics, labor economics, or finance,
among others. However, admittedly, when you are a novice to the
field, the examples and illustrations in econometric textbooks may
not be that entertaining, and hence the very fact that illustrations are
chosen as such may reduce your wish to master the methods your-
selves. Well, in plain English, several examples in textbooks do not
look very challenging.
At the same time, econometric textbooks also seem to have
some knowledge content that is difficult to grasp for a novice. These
books usually introduce a method and then they apply it, always with
great success, to a case at hand. Now, how did the authors know in
advance which method would work best for a certain question? And,
even more so, is it not the case that, first, there is a question and then
there is a method that could come in handy? And could it be that
someone first has tried a variety of methods and that then after some
time it is found that one method is more useful than another?
That brings me to the main idea of this book, and that is that
questions come first and econometric methods come next. As
a consequence and as you will see, the chapters in this book therefore
have a format opposite to the one that is commonly used. The main
1
2 introduction
more detail
This first chapter provides the motivation and a brief outline.
Econometric methods and techniques can often be applied in practice,
but they usually come in third place. First, there is a question. Then
there need to be data to be analyzed. Textbooks usually present an
overwhelming array of methods and techniques but rarely address
how to collect relevant data, let alone that the books provide creative
inspiration for the formulation of questions. This book seeks to pro-
vide some such inspiration by examining a range of questions, many of
which one perhaps would not have thought about in the first place,
and then to illustrate how relevant data can be acquired such that
basic econometric methods and techniques can be applied. It is not
difficult to make econometric methods more difficult. It is more
difficult to try to make matters easier.
Motivation
The title of this book may sound like an oxymoron. Wiktionary
(consulted March 11, 2016) gives for “enjoyable”:
more detail 3
Well, I know that this summary describes matters well, but I can
readily appreciate that it does not arouse much warmth and enthu-
siasm. For many students, academics, and practitioners, it therefore
may seem that the two words in the book title are disconnected.
The “econo” part of the second word seems OK, but the “metrics”
part makes the combined term somewhat daunting. One could won-
der whether “economics,” which to many people already seems like
an applied mathematics discipline, can be made even more quantita-
tive by adding even more metrics.
One cause for the seeming disconnection may be a cursory look
into an introductory textbook on econometrics, where one may bump
into “text” like the following:
ei = yi − a − bxi
4 introduction
and
Eðs2 Þ ¼ σ2 :
Now, what could this possibly mean? And, notably, this kind of text
usually comes in one of the first chapters, while then there still are
hundreds of pages to come in a textbook. So, why do we need all this?
Another possible cause for the felt disconnection can be that
most textbooks on econometrics typically focus on economic relations
in the macroeconomic world or in finance. So, the focus often is on
gross domestic product, unemployment, and inflation or on the
New York Stock Exchange and the Nikkei index. In the present book,
where the intention is to give meaning to the title, this second potential
cause for believing enjoyable econometrics is an oxymoron is addressed
in a particular way. As you may have seen in the table of contents, some
of the questions that I will address are not the very standard ones.
Clearly, anyone who has a glance at the content of an introduc-
tory textbook of econometrics will surely agree that mathematics is
important for econometrics because most of these textbooks are full of
mathematical notation. In fact, also in the forthcoming Chapter 2,
some of such notation will be used too, although the intention is to
keep it to a minimum. So, at first sight, econometrics is considered
a highly technical subject, which demands substantial skills from those
who practice it in real-life situations. At the same time, it is not true
that econometric methods are only designed for the sake of creating
ever more complicated tools. No, in many situations the techniques are
really very helpful, for example, when it comes to forecasting economic
variables like, indeed, gross domestic product (GDP) growth, inflation,
and unemployment or when it comes to evaluate, for example, the
merits of educational programs or tax reform programs.
more detail 5
chapters 3 to 8
The six chapters after Chapter 2 all address topical questions, all
arranged in chapters with a specific theme. Chapter 3 deals with
money, quite literally in fact. In early 2002, something happened in
Germany that triggered some of my questions in this chapter. What
happened was the exchange of a banknote of 300 euros for payment at
a gas station, where the customer received 250 euros in notes of 100
and 50 in return. The euro had just been introduced, and people
apparently needed time to adjust to the new notes, and certainly that
one of 300 euros. Well, as you might have guessed, there is no such
thing as a 300-euro banknote! This smart but illegal construction,
however, triggered me. Why do we have 10, 20, and 50 on our bank-
notes and not 30 or 40? And how do we make payments anyway? What
is it that we do when we want to make a cash payment and look into
our wallets to make a choice among the available notes and coins?
chapters 3 to 8 9
the examples give you some idea how this works in practice. The two
new econometric tools are multiple regression and the logit model,
both of which are highlighted, as promised, in the appendix.
We stay close to money in the next chapter, as Chapter 5 deals
with banknotes and postage stamps, where now the focus is on their
potential use as collectibles. At times, people wonder what are the
best ways to invest money and to have some returns at a later stage,
perhaps to be used as savings for a rainy day. In economics, it is usually
assumed that people invest in companies buy holding stocks or coun-
tries by having bonds, but people can also invest in art or in rare
collector’s items. Stocks and bonds have various specific features,
and one of them is that their prices may suddenly go up, in a race to
the top, and after that show a price nadir of substantial size. These
patterns are usually called bubbles, and the most famous ones are the
Tulip Bubble in seventeenth-century Netherlands and the South Sea
Bubble in early eighteenth-century England. In Chapter 5, it is asked
whether postage stamp prices also face bubbles and what might cause
these bubbles. It turns out that scarcer stamps keep on having their
high investment value, whether there are bubbles or not. Now, how
can we estimate which stamps are more rare than others are? And how
does this work for banknotes? Some banknotes were issued only for
a short while, and perhaps these are scarce? As there may be a link
between inflation rates and the values on banknotes, would there be
any relation between these, that is, does inflation make the number of
zeroes to go up, or is it the other way around? Chapter 5 introduces, yes
again in the appendix, a multi-equation version of the simple regres-
sion model. This model is called a vector autoregression, and it is very
often used in practice because it is simple to apply. This model can
also prevent finding spurious relations across two or more variables.
The appendix to Chapter 5 shows how that works.
Chapter 6 addresses a range of quite different questions. The first
question deals with a well-known urban legend. It is said – or, better, it
is believed – that the current state of the economy is visible from the
length of a woman’s dress. When the economy is doing well, skirts get
chapters 3 to 8 11
shorter (where somehow people have the roaring twenties and the
hippy sixties in mind), and when the economy is going down, dress
lengths increase. This phenomenon is called the hemline index, and it
regularly gets attention in popular media and also in professional
media. Well, one day I decided (together with a student) to collect the
data and to put the urban legend to an econometric test.
In Chapter 6, we also return to the peak years of creative artists.
There the focus is on whether people who peak later also get older.
That would make sense from an experience point of view, but is there
also some evidence for that?
Going back to the sixties and seventies of the twentieth century
brings up an interesting question about music. Being over 50, I notice
myself sometimes saying to students that “many things were better in
the past,” and then I usually refer to music. I mention Pink Floyd,
Queen, the Rolling Stones (never was very fond of the Beatles, by the
way), Led Zeppelin, and the like, and then they usually gaze at me
with this misty look like “What is he talking about?” Well, for a long
time, these rock bands dominated the charts, and to many these days,
these bands are still the main favorites. In the Netherlands, there is,
each year, a chart called the Top2000, and it features the 2000 most
favorite songs, as indicated by and voted for by the Dutch public.
Often this list is called a list for old men (where, for students, old
means over 40), as for many years now, those bands mentioned have
topped the lists. So, the question is, is older music better indeed?
Looking at many years of data in the Top2000 lists should somehow
provide an answer. In part, the analysis relies on an alternative econo-
metric model, which is a model that allows for S-shaped patterns,
a model that is introduced in the appendix.
In Chapter 7, the move is toward the academic process itself.
Scientists are expected to publish their work in academic journals,
usually in the format of a paper. Papers can range from 5 to 40 printed
pages in those academic journals, and there is a ranking of the quality
of these journals. A publication in a top journal can advance one’s
career, and such publications usually mark the start of a successful
12 introduction
career. Now, getting one’s work published is one thing, but to have
colleagues and the media pay attention to your work is quite another
thing. Among other numbers, one number that I will present in this
chapter is the fraction of my own articles that effectively were ignored
completely. I will not give away the fraction yet, but if I would have
known it in advance, I could have saved more than 1500 pages of
typing. Anyway, sometimes articles do receive attention, and it
would be interesting to know which features these successful articles
have. So, one question to be addressed is which types of econometrics-
based articles get the most attention? Is it new data? Is it a new
econometric method, or is it the research question itself? And does
it help to be more productive, as an academic? Does the writing of
more articles lead to more attention for those articles? And, as one part
of the publication process involves judgment and suggestions by
reviewers, do the implemented modifications based on their sugges-
tions lead to more citations? In the technical appendix, I will present
another model for S-shaped data.
To end this book, there will be chapter on trends and hypes.
In economics, when we think of trends, we consider trends in eco-
nomic prosperity, in populations, in prices, and in, for example, pro-
duction. Often, the trends go up, and the question typically is whether
these trends will go up forever and whether events can change recent
trends and make the trend wander away in another direction. In the
appendix to Chapter 8, I will address a few simple econometric models
for trends, and I will discuss how to choose between these models, if
one wishes to do so. Much academic research in econometrics in the
past few decades has addressed this seemingly simple issue because
it was found to not be simple. In the appendix, I will direct some
attention to the underlying reason why this is the case. And, because
common trends are such an important and Nobel Prize–worthy topic,
the appendix contains a concise discussion on those.
Otherwise, Chapter 8 will try to answer various other questions
about trends. Trends in the climate, for example, are a hotly disputed
topic. But is local or global warming equally distributed throughout
to conclude 13
the year, or could it be that only winters are getting warmer? Anecdotal
evidence and personal memories about summers in the Netherlands do
not suggest that summers are getting warmer.
Another trend can be found in prescribing medication, in particular
for attention deficit hyperactivity disorder symptoms. Recent years have
seen a tremendous growth in the use of methylphenidate and atomox-
etine, in particular in young children. Are these trends going to persist?
The prices and salaries of top football players are on the rise too.
In 2016, Paul Pogba came to Manchester United for 105 million euros,
and one may wonder: Where will this end?
Finally, sometimes a trend turns out to be hype. By the late
1990s, there was much buzz about a phenomenon called “The New
Economy.” One feature of this was the declared and foreseen end of
unemployment. Well, with a recent worldwide crisis just recently
experienced and the rise of unemployment fresh in our memory, one
may wonder: Was it hype? Moreover, if it was, when will we stop
talking and writing about it?
to conclude
One motivation for writing this book is to emphasize that econo-
metric models and methods can also be applied to more unconven-
tional settings, which are typically settings where the practitioner has
to collect his or her own data first. Such collection can be done by
carefully combining existing databases but also by holding surveys or
running experiments. A nice by-product of having to collect one’s own
data is that this helps to make a proper and educated choice among the
wealth of potential methods and techniques to be considered.
Another motivation for writing this book concerns the recom-
mendation to engage in applying econometric methods. A casual
glance at many econometric studies seems to suggest that most
practitioners have a solid view of their research questions. Indeed,
someone who needs an econometric model to create out-of-sample
forecasts usually knows that he or she wants a tool that somehow
provides accurate forecasts. And those who evaluate policy programs
Exploring the Variety of Random
Documents with Different Content
Lehot täynnä lehmäsiä,
Warsinkin on vuohisia.
Appi ainoa isäntä,
Anoppi ainoa emäntä,
Kytyjä on kyllältäsi,
Natosia on kosolta.
*****
Waivan nägiäzein.
Sulattoman suviazein. Aigoin armozein.
Kallis kandajazein. Sulan "
Armas aigomazein. Päivien "
Nainje tshuudittajazein. Ehtoin "
" kuvoajazein. Kergein "
" savistoazein. Kallis "
" keritteäzein. Pestyn "
" päivin ottajazein.
" voaliazein.
" kandajazein.
" kylvetteäzein.
" verzoazein.
" maksoazein.
Hääitku.
Morsian itkee äidille, muistelee hänen hyvyyttään ja rakkauttaan:
[1]
Hääitku.
Hääitku.
*****
Kehtolaulu.
Laulajan runo.
Ihmiset ajatteloot
Minun ilolla laulavani.
Wain en mie ilolla laula
Enkä mielellä hyvällä.
Laulan kurja kulkujani,
Raukka rannan juoksujani,
Waivaine vaelluksiini.
Jou'uin kurja kulkemahe,
Waivaine vaeltamahe
Ihmiset ajatteloopi
Humalassa huutavani,
Wiinassa viheltäväni,
Jos vaan virren veärin laulan,
Sanat ristihin repäsen.
Neljäs Luku.
Karjalan Aatelia.
Kalevala XLI.
Shemeikkalaisten sukuperä. Shemeikan Semana muuttaa
Ruodavuksen järven rannalle asumaan. Semanan Miihkali ja hänen
peuravirtensä. Miihkali tappaa kaksikymmentä "Ruotshin sissie"
Kalmalammin rannalla. Miihkalin Hilippa ja hänen poikansa.
Shemeikkalaisten suku haaraantuu. Joakoi ja Iivana veljekset.
Jaakoin Jehti ja hänen urostyönsa. Jehkin Iivana manaa karhua
pakenemaan. Jehkin Iivanan virsi maailman luomisesta. Hilipan
Iivana kuolee 109 vuoden vanhana. Hänen pojanpoikansa Waslei ja
Mysysvaaran Petri. Petri ukon ulkoryhti. Hänen peuranhiihtonsa
Poastarven salolla. Mysysvaaran Petri virsikkään Salmin kihlakunnan
paras runonlaulaja. Shemeikkalaiset Karjalan aatelia. Mysysvaaran
Petrin ja Jehkin Iivanan virsiä ja loitsuja.
Satu oli itsessään erittäin kaunis, mutta sen vaikutusta lisäsi vielä
sopiva kehystä ympärillämme. Kaikki oli niin tyyntä ja hiljaista.
Kesäyön hämärässä näyttivät puut ja muut esineet niin utuisen
epämääräisiltä. Silmä ei kohdannut missään jyrkkiä piirteitä, joihin se
olisi voinut kiintyä. Ja tuo samainen epämääräisyys, se kuvastui
mainiosti Iivanan saduissa ja runoissa. — Pohjolan luonnostahan
meidän vanha kansanrunoutemme on saanutkin rikkaimmat
aiheensa. Persoonoittuja luonnon voimiahan ovat enimmäkseen
esivanhempiemme jumaluus taruston haltijat ja sankarit.
Sanoisin sodisavukse;
Pien olis sodisavukse;
Sanoisin paimosiin tulekse;
Suur' olis paimosiin tulekse.
Shemeikkalaisten suku.
Semana.
Miihkali
Filippa.
Joakoi. Tiitta. Lari. Niksor. Iivana.
Jehki. Iivana. Petri.
Iivana. Mikolai. Mihaila. Mikki. Teroi.
Waslei.
Mysysvaaran Petri.
Mittelemme miekkojamme,
Koittelem' on korttiamme;
Kumman miekka on pitembi,
Kumman kortti korgiambi.
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