Empirical Tools Flashcards
What is Empirical Public Finance?
The use of data and statistical methods to measure the impact of government policy on individuals and markets.
What is correlation?
Two economic variables are correlated if they move together.
e.g. height and weight.
What is causation?
Two economic variables are causally related if the movement of one causes movement of the other.
e.g. good nutrition as an infant increases adult height.
What is the identification problem?
Where causation and correlation get confused.
What are the 3 possible explanations between two variables A and B?
1) A is causing B
2) B is causing A
3) A third factor is causing both
What is the general problem that empirical economists face in trying to use existing data to assess the casual influence of one factor or another?
You can’t immediately go from correlation to causation.
What is a randomised trial?
The ideal type of experiment designed to test causality.
A group of individuals is randomly divided into a treatment group which receives the treatment of interest. The other group is called the control group which doesn’t receive the treatment.
What is bias?
A source of difference between treatment and control groups that is correlated with the treatment but is not due to the treatment.
What is the “Law of Large Numbers”
The odds of getting the wrong answer approaches zero as the sample size grows.
Large sample sizes allow researchers to eliminate any consistent differences between groups.
What was the randomised trial of ERT (Estrogen replacement therapy)
The randomised trial of ERT tracked over 16,000 women ages 50-79 who were recruited to participate in the trial by 40 clinical centres in the US. The study was supposed to last 8.5 years but was stopped after 5.2 years because its conclusion was already clear: ERT did raise the risk of heart disease.
What are the two problems with randomised trials?
1) External Validity
The results are only valid for the sample of individuals who volunteer to be either treatments or controls and this sample may be different from the population at large.
- e.g. different countries may give different results
2) Attrition
Individuals may leave the experiment before it is complete. Reduction in the size of samples over time can lead to bias estimates (if not random)
What is observational data?
Data generated by individual behaviour observed in the real world, not in the context of deliberately designed experiments.
What is time series analysis?
Analysis of the co-movement of two series over time.
What is cross-sectional regression analysis?
Statistical analysis of the relationship between two or more variables exhibited by many individuals at one point in time.
Explain two problems associated with time series analysis.
1) It doesn’t necessarily demonstrate a causal effect of TANF benefits on labour supply.
- When there is a slow-moving trend in one variable through time, as is true for the general decline in income guarantees over this period, it is very difficult to infer its casual effects on another variable.
2) Other factors get in the way of a causal interpretation of this correlation over time.
- e.g. economic growth, a more generous earned income tax credit
- These can cause bias in the time series analysis because they are also correlated with the outcome of interest.
