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Classroom Companion: Economics

Valérie Mignon

Principles
of Econometrics
Theory and Applications
Classroom Companion: Economics
The Classroom Companion series in Economics includes undergraduate and grad-
uate textbooks alike. It welcomes fundamental textbooks aimed at introducing
students to the core concepts, empirical methods, theories and tools of the field, as
well as advanced textbooks written for students at the Master and PhD level seeking
a deeper understanding of economic theory, mathematical tools and quantitative
methods.
Valérie Mignon

Principles of Econometrics
Theory and Applications
Valérie Mignon
EconomiX-CNRS
University of Paris Nanterre
Nanterre Cedex, France

ISSN 2662-2882 ISSN 2662-2890 (electronic)

Classroom Companion: Economics
ISBN 978-3-031-52534-6 ISBN 978-3-031-52535-3 (eBook)
https://doi.org/10.1007/978-3-031-52535-3
The translation was done with the help of an artificial intelligence machine translation tool. A subsequent
human revision was done primarily in terms of content.
Translation from the French language edition: “Économétrie - Théorie et applications - 2e éd.” by Valérie
Mignon, © 2022. Published by Economica. All Rights Reserved.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland
AG 2024
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Paper in this product is recyclable.

Preface

Econometrics is the study and measurement of economic phenomena based on

the statistical observation of relevant quantities describing them. Econometrics is
a branch of economic science that draws jointly on economic theory, statistics,
mathematics, and computer science. In particular, it is used to analyze and verify,
i.e., to test, economic phenomena and theories.
Econometrics, as a discipline, was born in 1930 with the creation of the
Econometric Society by Ragnar Frisch, Charles Roos, and Irving Fisher. Frisch
(1933) defines econometrics as follows: “econometrics is by no means the same
as economic statistics. Nor is it identical with what we call general economic
theory, although a considerable portion of this theory has a definitely quantitative
character. Nor should econometrics be taken as synonymous with the application
of mathematics to economics. Experience has shown that each of these three
viewpoints, that of statistics, economic theory, and mathematics, is a necessary,
but not by itself a sufficient, condition for a real understanding of the quantitative
relations in modern economic life. It is the unification of all three that is powerful.
And it is this unification that constitutes econometrics.”
The development of databases—particularly at a very fine level and at high
frequency—combined with the development of computer tools has enabled this
unification of economic theory, statistics, and mathematics. Moreover, as Pirotte
(2004) reminds us “econometrics provides economists with a fundamental basis
for studying the prospects and consequences of economic policies that can be
applied. More specifically, it is the only method that provides both quantitative
and qualitative information.” Thus, through macroeconometric models in particular,
econometrics is characterized by a high level of operational content, especially
for macroeconomists, economic analysts, and policymakers. Macroeconometric
models, the aim of which is to describe economic activity, are used as a simulation
tool and thus provide an aid to policy decision-making. Similarly, in the field of
finance, econometrics has undergone considerable developments, enabling us to
better understand the dynamics of financial markets.

v
vi Preface

Work with econometric content has developed substantially during the twentieth
century, as demonstrated by the large number of journals on econometrics.1
Examples include: Biometrika, Econometrica, Econometric Theory, Econometric
Reviews, Journal of Econometrics, Journal of the American Statistical Association,
Journal of Time Series Analysis, and Quantitative Economics. There are also
journals with more applied content such as Empirical Economics, International
Journal of Forecasting, Journal of Applied Econometrics, Journal of Business and
Economic Statistics, and Journal of Financial Econometrics. In addition, many gen-
eral economic journals publish articles with strong econometric content: American
Economic Review, Economics Letters, European Economic Review, International
Economic Review, International Economics, Journal of the European Economic
Association, Quarterly Journal of Economics, and Review of Economic Studies.
The rise of econometrics can also be illustrated by the fact that recent Nobel
Prizes in economics have been awarded to econometricians. James Heckman and
Daniel McFadden received the Nobel Prize in Economics in 2000 for their work
on theories and methods for the analysis of selective samples and on discrete
choice models. Similarly, in 2003, the Nobel Prize in Economics was awarded to
Robert Engle and Clive Granger for their work on methods of analyzing economic
time series with (i) time-varying volatility (R. Engle) and (ii) common trends (C.
Granger), which has contributed to improved forecasts of economic growth, interest
rates, and stock prices. The Prize was also awarded to Christopher Sims and Thomas
Sargent in 2011 for their empirical work on cause and effect in the macroeconomy,
and to Eugene Fama, Lars Peter Hansen, and Robert Shiller in 2013 for their
empirical analysis of asset prices.
These different points testify that econometrics is a discipline in its own right and
a fundamental branch of economics.
This book aims to provide readers with the basics of econometrics. It is composed
of eight chapters. The first, introductory chapter recalls some essential concepts in
statistics and econometrics. Chapter 2 deals with the simple regression model. Chap-
ter 3 generalizes the previous chapter to the case of the multiple regression model, in
which more than one explanatory variable is included. In Chap. 4, the fundamental
themes of heteroskedasticity and autocorrelation of errors are addressed in detail.
Chapter 5 brings together a set of problems related to explanatory variables. It deals
successively with dependence between explanatory variables and the error term, the
problem of multicollinearity, and the question of stability of the estimated models.
Chapter 6 introduces dynamics into the models and presents distributed lag models.
Chapter 7 extends the previous chapter by presenting time series models, a branch
of econometrics that has undergone numerous developments over the last 40 years.
Finally, Chap. 8 deals with structural models by studying simultaneous equations
models.

1 Pirotte’s (2004) book gives a history of econometrics, from the origins of the discipline to its
recent developments. See also Morgan (1990) and Hendry and Morgan (1995).
Preface vii

While providing a detailed introduction to econometrics, this book also focuses

on some recent developments in the discipline, particularly in time series econo-
metrics. The choice to focus on contemporary advances means that some topics
have been deliberately omitted. This is notably the case for panel data econometrics
(Matyas and Sevestre, 2008; Wooldridge, 2010; Baltagi, 2021), spatial econometrics
(LeSage and Pace, 2008; Elhorst, 2014), econometrics of qualitative variables
(Gouriéroux, 2000; Greene, 2020), and models with unobservable variables (Flo-
rens, Marimoutou, and Péguin-Feissolle, 2007), and nonlinear models (see in
particular Florens et al., 2007; Greene, 2020).
All the theoretical developments in this book are illustrated by numerous
applications to macroeconomics and finance. Each chapter contains several concrete
empirical applications, using Eviews software. This permanent combination of
theoretical and applied aspects will allow readers to quickly put into practice the
different concepts presented.
This book is the fruit of various econometrics courses taught by the author at the
University of Paris Nanterre in France. It is primarily intended for undergraduates
and graduates in economics, management, and in mathematics and computer science
applied to the social sciences, as well as for students at business and engineering
schools. It will also be useful for professionals who work with econometric
techniques. They will find in it practical solutions to the various problems they face.
I would like to thank Agnès Bénassy-Quéré, Hubert Kempf, and Jean Pavlevski
for encouraging me to write this textbook, the first edition of which was published
in French in 2008. I am particularly indebted to Hubert Kempf for prompting me to
write this new edition in English, and to my publisher, Springer. I would also like
to thank Emmanuel Dubois for his constant support and for the help he gave me in
formatting this book.
To Tania and Emmanuel

Paris, France Valérie Mignon

About This Book

Bringing together theory and practice, this book presents the basics of econometrics
in a clear and pedagogical way. It focuses on the acquisition of the methods
and skills that are essential for all students wishing to succeed in their studies
and for all practitioners wishing to apply econometric techniques. The approach
adopted in this textbook is resolutely applied. Through this book, the author
aims to meet a pedagogical and operational need to quickly put into practice
the various concepts presented (statistics, tests, methods, etc.). This is why, after
each theoretical presentation, numerous examples are given, as well as empirical
applications carried out on the computer using existing econometric and statistical
software.
This textbook is primarily intended for students of bachelor’s and master’s
degrees in Economics, Management, and Mathematics and Computer Sciences, as
well as for students of Engineering and Business schools. It will also be useful for
professionals who will find practical solutions to the various problems they face.

ix
Contents

1 Introductory Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 What Is Econometrics? Some Introductory Examples . . . . . . . . . . . . . . . . 1
1.1.1 Answers to Many Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.2 The Example of Consumption and Income . . . . . . . . . . . . . . . . . . . . 2
1.1.3 The Answers to the Other Questions Asked . . . . . . . . . . . . . . . . . . . 4
1.2 Model and Variable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2.1 The Concept of Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2.2 Different Types of Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.2.3 Explained Variable/Explanatory Variable . . . . . . . . . . . . . . . . . . . . . 9
1.2.4 Error Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.3 Statistics Reminders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.3.1 Mean. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.3.2 Variance, Standard Deviation, and Covariance . . . . . . . . . . . . . . . . 11
1.3.3 Linear Correlation Coefficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.3.4 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.4 A Brief Introduction to the Concept of Stationarity . . . . . . . . . . . . . . . . . . . 17
1.4.1 Stationarity in the Mean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.4.2 Stationarity in the Variance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
1.4.3 Empirical Application: A Study of the Nikkei Index . . . . . . . . . 21
1.5 Databases and Software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.5.1 Databases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.5.2 Econometric Software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2 The Simple Regression Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1.1 The Linearity Assumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1.2 Specification of the Simple Regression Model and
Properties of the Error Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.1.3 Summary: Specification of the Simple Regression Model. . . . 32
2.2 The Ordinary Least Squares (OLS) Method . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.2.1 Objective and Reminder of Hypotheses . . . . . . . . . . . . . . . . . . . . . . . 33

xi
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xii Contents

2.2.2 The OLS Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.2.3 The OLS Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2.2.4 Properties of OLS Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.2.5 OLS Estimator of the Variance of the Error Term. . . . . . . . . . . . . 49
2.2.6 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
2.3 Tests on the Regression Parameters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2.3.1 Determining the Distributions Followed by the OLS
Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2.3.2 Tests on the Regression Coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.3.3 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
2.4 Analysis of Variance and Coefficient of Determination . . . . . . . . . . . . . . . 64
2.4.1 Analysis of Variance (ANOVA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
2.4.2 Coefficient of Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
2.4.3 Analysis of Variance and Significance Test of the
Coefficient β . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
2.4.4 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
2.5 Prediction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
2.6 Some Extensions of the Simple Regression Model . . . . . . . . . . . . . . . . . . . 75
2.6.1 Log-Linear Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
2.6.2 Semi-Log Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2.6.3 Reciprocal Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
2.6.4 Log-Inverse or Log-Reciprocal Model . . . . . . . . . . . . . . . . . . . . . . . . 80
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Appendix 2.1: Demonstrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Appendix 2.2: Normal Distribution and Normality Test . . . . . . . . . . . . . . . . . . . . 97
Appendix 2.3: The Maximum Likelihood Method . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3 The Multiple Regression Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
3.1 Writing the Model in Matrix Form . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
3.2 The OLS Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
3.2.1 Assumptions of the Multiple Regression Model . . . . . . . . . . . . . 107
3.2.2 Estimation of Coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
3.2.3 Properties of OLS Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
3.2.4 Error Variance Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.2.5 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.3 Tests on the Regression Coefficients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
3.3.1 Distribution of Estimators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
3.3.2 Tests on a Regression Coefficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
3.3.3 Significance Tests of Several Coefficients . . . . . . . . . . . . . . . . . . . . . 120
3.4 Analysis of Variance (ANOVA) and Adjusted Coefficient
of Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.4.1 Analysis-of-Variance Equation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.4.2 Coefficient of Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Contents xiii

3.4.3 Adjusted Coefficient of Determination . . . . . . . . . . . . . . . . . . . . . . . . 126

3.4.4 Partial Correlation Coefficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
3.4.5 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
3.5 Some Examples of Cross-Sectional Applications . . . . . . . . . . . . . . . . . . . . . 134
3.5.1 Determinants of Crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
3.5.2 Health Econometrics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
3.5.3 Inequalities and Financial Openness . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
3.5.4 Inequality and Voting Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
3.6 Prediction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
3.6.1 Determination of Predicted Value and Prediction Interval . . . . 140
3.6.2 Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
3.7 Model Comparison Criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
3.7.1 Explanatory Power/Predictive Power of a Model . . . . . . . . . . . . . 143
3.7.2 Coefficient of Determination and Adjusted Coefficient
of Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
3.7.3 Information Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
3.7.4 The Mallows Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
3.8 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
3.8.1 Practical Calculation of the OLS Estimators . . . . . . . . . . . . . . . . . 148
3.8.2 Software Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Appendix 3.1: Elements of Matrix Algebra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Appendix 3.2: Demonstrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
4 Heteroskedasticity and Autocorrelation of Errors . . . . . . . . . . . . . . . . . . . . . . . 171
4.1 The Generalized Least Squares (GLS) Estimators . . . . . . . . . . . . . . . . . . . . 172
4.1.1 Properties of OLS Estimators in the Presence
of Autocorrelation and/or Heteroskedasticity . . . . . . . . . . . . . . . . . 172
4.1.2 The Generalized Least Squares (GLS) Method . . . . . . . . . . . . . . . 173
4.1.3 Estimation of the Variance of the Errors . . . . . . . . . . . . . . . . . . . . . . . 175
4.2 Heteroskedasticity of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
4.2.1 The Sources of Heteroskedasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
4.2.2 Estimation When There Is Heteroskedasticity . . . . . . . . . . . . . . . . 177
4.2.3 Detecting Heteroskedasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
4.2.4 Estimation Procedures When There Is Heteroskedasticity . . . 186
4.2.5 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
4.3 Autocorrelation of Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
4.3.1 Sources of Autocorrelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
4.3.2 Estimation When There Is Autocorrelation . . . . . . . . . . . . . . . . . . . 198
4.3.3 Detecting Autocorrelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
4.3.4 Estimation Procedures in the Presence of Error
Autocorrelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
4.3.5 Prediction in the Presence of Error Autocorrelation . . . . . . . . . . 216
xiv Contents

4.3.6 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
5 Problems with Explanatory Variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
5.1 Random Explanatory Variables and the Instrumental Variables
Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
5.1.1 Instrumental Variables Estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
5.1.2 The Hausman (1978) Specification Test . . . . . . . . . . . . . . . . . . . . . . . 226
5.1.3 Application Example: Measurement Error . . . . . . . . . . . . . . . . . . . . 226
5.2 Multicollinearity and Variable Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
5.2.1 Presentation of the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
5.2.2 The Effects of Multicollinearity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
5.2.3 Detecting Multicollinearity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
5.2.4 Solutions to Multicollinearity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
5.2.5 Variable Selection Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
5.3 Structural Changes and Indicator Variables. . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
5.3.1 The Constrained Least Squares Method . . . . . . . . . . . . . . . . . . . . . . . 242
5.3.2 The Introduction of Indicator Variables . . . . . . . . . . . . . . . . . . . . . . . 243
5.3.3 Coefficient Stability Tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
Appendix: Demonstration of the Formula for Constrained Least
Squares Estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263
6 Distributed Lag Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
6.1 Why Introduce Lags? Some Examples. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
6.2 General Formulation and Definitions of Distributed
Lag Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268
6.3 Determination of the Number of Lags and Estimation . . . . . . . . . . . . . . . . 270
6.3.1 Determination of the Number of Lags . . . . . . . . . . . . . . . . . . . . . . . . . 270
6.3.2 The Question of Estimating Distributed Lag Models . . . . . . . . . 271
6.4 Finite Distributed Lag Models: Almon Lag Models . . . . . . . . . . . . . . . . . . 271
6.5 Infinite Distributed Lag Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
6.5.1 The Koyck Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
6.5.2 The Pascal Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
6.6 Autoregressive Distributed Lag Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
6.6.1 Writing the ARDL Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
6.6.2 Calculation of ARDL Model Weights . . . . . . . . . . . . . . . . . . . . . . . . 282
6.7 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
Contents xv

7 An Introduction to Time Series Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287

7.1 Some Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
7.1.1 Time Series. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
7.1.2 Second-Order Stationarity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
7.1.3 Autocovariance Function, Autocorrelation Function,
and Partial Autocorrelation Function . . . . . . . . . . . . . . . . . . . . . . . . . . 289
7.2 Stationarity: Autocorrelation Function and Unit Root Test . . . . . . . . . . . 293
7.2.1 Study of the Autocorrelation Function. . . . . . . . . . . . . . . . . . . . . . . . . 293
7.2.2 TS and DS Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
7.2.3 The Dickey-Fuller Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
7.3 ARMA Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
7.3.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
7.3.2 The Box and Jenkins Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
7.3.3 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
7.4 Extension to the Multivariate Case: VAR Processes . . . . . . . . . . . . . . . . . . 327
7.4.1 Writing the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
7.4.2 Estimation of the Parameters of a V AR(p) Process
and Validation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
7.4.3 Forecasting VAR Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
7.4.4 Granger Causality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
7.4.5 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332
7.5 Cointegration and Error-Correction Models . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
7.5.1 The Problem of Spurious Regressions . . . . . . . . . . . . . . . . . . . . . . . . . 336
7.5.2 The Concept of Cointegration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
7.5.3 Error-Correction Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
7.5.4 Estimation of Error-Correction Models and
Cointegration Tests: The Engle and Granger (1987)
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
7.5.5 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
8 Simultaneous Equations Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
8.1 The Analytical Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
8.1.1 Introductory Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
8.1.2 General Form of Simultaneous Equations Models . . . . . . . . . . . 355
8.2 The Identification Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
8.2.1 Problem Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
8.2.2 Rank and Order Conditions for Identification . . . . . . . . . . . . . . . . . 358
8.3 Estimation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
8.3.1 Indirect Least Squares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
8.3.2 Two-Stage Least Squares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
8.3.3 Full-Information Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365
8.4 Specification Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
xvi Contents

8.5 Empirical Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368

8.5.1 Writing the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
8.5.2 Conditions for Identification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369
8.5.3 Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
8.5.4 Model Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376
The Gist of the Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377

Appendix: Statistical Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401
About the Author

Valérie Mignon is Professor of Economics at the University of Paris Nanterre

(France), Member of the EconomiX-CNRS research center, and Scientific Advisor
to the leading French center for research and expertise on the world economy,
CEPII (Paris, France). She teaches econometrics at undergraduate and graduate
levels. Her econometric research focuses mainly on macroeconomics, finance,
international macroeconomics and finance, and energy, fields in which she has
published numerous articles and books.

xvii
Introductory Developments
1

After defining the concepts of model and variable, this chapter offers some statistical
reminders about the mean, variance, standard deviation, covariance, and linear
correlation coefficient. A brief introduction to the concept of stationarity is also
provided. Finally, this chapter lists the main databases in economics and finance,
as well as the most commonly used software packages. Beforehand, we give some
introductory examples to illustrate in a simple way what econometrics can do.

1.1 What Is Econometrics? Some Introductory Examples

Econometrics is a discipline with a strong operational content. It enables us to

quantify a phenomenon, establish a relationship between several variables, validate
or invalidate a theory, evaluate the effects of an economic policy measure, etc.

1.1.1 Answers to Many Questions

Econometrics provides answers to a wide range of questions. Let us take some

simple examples.

– Are the terms of trade a determinant of the value of exchange rates? Do other
economic variables have more impact?
– Is the purchasing power parity theory empirically verified?
– Do rising oil prices have a significant impact on car sales?
– Is the depreciation of the dollar compatible with rising oil prices?
– Is the euro overvalued? If so, by how much? In other words, what is the
equilibrium value of the euro?
– Are international financial markets integrated?

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2024 1

V. Mignon, Principles of Econometrics, Classroom Companion: Economics,
https://doi.org/10.1007/978-3-031-52535-3_1
2 1 Introductory Developments

– Is the efficient capital market hypothesis confirmed?

– Is there international convergence in GDP per capita?
– What is the impact of the 35-hour work week on unemployment?
– Does higher inflation reduce unemployment?
– Does their parents’ socio-occupational category have an impact on children’s
level of education?
– What is the impact of air pollution on children’s health?
– What are the effects of global warming on economic growth?
– etc.

To answer these questions, the econometrician must build a model to relate the
variables of interest. Consider, for example, the question “What is the impact of an
increase of 10 monetary units in income on household consumption?”

1.1.2 The Example of Consumption and Income

To answer this question, two variables need to be taken into account: household
consumption and household income (gross disposable income). To relate these two
variables, we write an equation of the following type:

CONS = α + β × I N C
. (1.1)

where CON S denotes consumption and I N C income. The impact of a variation

in income on consumption is taken into account by the parameter .β. To quantify
this impact, it is necessary to have a numerical value for the coefficient .β. To this
end, an estimation of the model is performed: estimating a model thus amounts to
quantifying it, i.e., quantifying the relationship between two or more variables. In
the following, we will detail the methods available for estimating a model. For the
moment, let us restrict ourselves to a few illustrations.
Consider two countries: Finland and Italy. For each of the two countries, we
want to assess the impact of a 10-unit increase in the gross disposable income of
Finnish (resp. Italian) households on their consumption. Figures 1.1 and 1.2 show
the evolution of real consumption (CON S) and income (I N C) of households for
each of the two countries.1 The data are annual and cover the period from 1995
to 2020.2 Regardless of which figure we look at, we see that the series move in the
same direction: consumption and income show an overall upward trend in the case of
Finland, and the two series move in tandem, alternating between bullish and bearish
phases, in the case of Italy. If there is a relationship between the two variables,

1 The series are expressed in real terms, i.e., they are deflated by the consumer price index of each

country.
2 The data are extracted from the national statistical institutes of the two countries: Statistics

Finland and the Italian National Institute of Statistics (Istat).

1.1 What Is Econometrics? Some Introductory Examples 3

Fig. 1.1 Evolution of 1,8E+11

consumption and gross
disposable income of Finnish 1,6E+11
households (euros),
1995–2020
1,4E+11

1,2E+11

1E+11

8E+10

6E+10
1995 2000 2005 2010 2015 2020
INC_FIN CONS_FIN

Fig. 1.2 Evolution of 1,2E+12

consumption and gross
disposable income of Italian 1,15E+12
households (euros),
1995–2020 1,1E+12

1,05E+12

1E+12

9,5E+11

9E+11

8,5E+11
1995 2000 2005 2010 2015 2020
INC_ITA CONS_ITA

it should therefore be positive. In other words, we expect the value obtained for
the coefficient .β to be positive. More specifically, if we estimate model (1.1), we
obtain the following values for the coefficient .β associated with income: 0.690 for
Finland and 0.721 for Italy. These values are positive, which means that an increase
in income is accompanied by an increase in consumption in both countries, all other
things being equal. We can also quantify this increase:

– A e10 increase in income in Finland translates into a e.6.90 increase in

consumption of Finnish households, all other things being equal.
– A e10 increase in income in Italy generates, all other things being equal, an
increase in consumption of Italian households of around e.7.21.

Although different, these two values are quite close, which means that household
consumption behavior, in relation to the change in income, is similar in Finland and
4 1 Introductory Developments

Italy, even though the economic characteristics of the two countries differ. In the
rest of this book, we will see that it is possible to refine these comments by studying
whether or not the values obtained are significantly different. This will be done
using statistical tests.

1.1.3 The Answers to the Other Questions Asked

To conduct their analysis, econometricians have to find the data they need. In the
case of the example previously studied, the following series are needed: household
consumption, household gross disposable income, and the consumer price indexes
for Finland and Italy, i.e., a total of six series. For this purpose, econometricians
need access to databases. Nowadays, there are many such databases, some of which
are freely accessible. A non-exhaustive list of the main economic and financial
databases is given at the end of this chapter. Once the data have been collected,
it is possible to proceed with the study in question.
Let us now consider the various questions posed in Sect. 1.1.1 and give some
possible answers.

– Are the terms of trade a determinant of the value of exchange rates? Do other
economic variables have more impact?
The following data are required for the country under consideration: export
prices, import prices, and the exchange rate, the ratio between export prices and
import prices being used to measure the terms of trade. To assess whether the
terms of trade are a determinant of the exchange rate, it is necessary to estimate a
model that relates the exchange rate and the terms of trade and to test whether the
coefficient associated with the variable “terms of trade” is significantly different
from zero. To determine whether other economic variables have more impact, we
need to add them to the previous model and study their statistical significance.
Other potential determinants include the country’s net foreign asset position,
productivity, interest rate differential, etc.
– Is the purchasing power parity theory empirically confirmed?
According to the purchasing power parity (PPP) theory, each country’s currency
provides the same purchasing power in all countries. In other words, if the
products traded are physically identical (without transport costs), the nominal
exchange rate (indirect quote) is determined by the relative price of the good,
i.e., .Qt = Pt /Pt∗ , which can be written in logarithmic form: .qt = pt − pt∗ where
the lowercase variables are the logarithms of the uppercase variables, .Qt is the
nominal exchange rate, .Pt is the domestic consumer price index, and .Pt∗ is the
foreign consumer price index. In order to grasp the empirical validity of PPP, we
can estimate a relationship of the type .qt = α + β1 pt − β2 pt∗ and check that
.α = 0, .β1 = β2 = 1. This is done by statistically testing that the coefficients

take certain specific values.

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1.1 What Is Econometrics? Some Introductory Examples 5

– Do rising oil prices have a significant impact on car sales?

This question can be answered by estimating an equation linking car sales to oil
prices. The value obtained for the coefficient assigned to oil prices will quantify
the effect of their increase on car sales. If a significant impact is detected, it is
expected to be negative, as higher oil prices generate an additional cost.
– Is the depreciation of the dollar compatible with rising oil prices?
This question about the link between oil prices and the dollar exchange rate
is essential because oil prices are denominated in dollars. Traditionally, it is
assumed that there is a positive relationship between the two variables, in the
sense that a rise in oil prices is generally accompanied by an appreciation of the
US currency. To understand the link between the two variables, it is necessary
to estimate a relationship explaining the dollar exchange rate by oil prices. The
coefficient assigned to the oil price variable should therefore be positive, and its
value makes it possible to quantify the impact of oil prices on the dollar.
– Is the euro overvalued? If so, by how much? In other words, what is the
equilibrium value of the euro?
To answer these questions, we need to define a “standard” corresponding to the
equilibrium value of the euro. Among the theories for determining equilibrium
exchange rates is the BEER (behavioral equilibrium exchange rate) framework.
By this approach, the exchange rate is linked in the long term to a set of economic
fundamentals, such as the net foreign asset position, the relative price level or any
other measure of productivity, the terms of trade, and the interest rate differential.
Estimating an equation that explains the euro exchange rate by these different
fundamentals allows us to define the equilibrium value of the European currency.
The question of overvaluation is then addressed by comparing the observed value
of the euro with its estimated equilibrium value. In Chap. 7, we will see that
estimating an equilibrium relationship, or long-term relationship, is based on
cointegration theory.
– Are international financial markets integrated?
There are, of course, many ways of approaching this fundamental question.
One possible approach is to adopt the work of Feldstein and Horioka (1980):
if financial markets are perfectly integrated, then capital is perfectly mobile,
which implies that capital should move to wherever the rate of return is
highest. Consequently, for a given country, the investment rate should be totally
uncorrelated with its savings rate. To understand this hypothesis, we need to
estimate a relationship linking the investment rate to the savings rate and to
consider the value of the coefficient assigned to the savings rate. The farther
from 1, the weaker the correlation and the more this suggests a high degree of
financial integration.
– Is the efficient capital market hypothesis confirmed?
In line with the weak form of informational efficiency, prices observed on a
market follow a random walk. In other words, price changes, or so-called returns,
are unpredictable in the sense that it is impossible to predict future returns from
past returns. A simple way to test this hypothesis is to estimate a relationship of
the type .Rt = α + βRt−1 and test whether the coefficient .β assigned to past
6 1 Introductory Developments

returns .Rt−1 is zero or not. If it is zero, the efficient capital market hypothesis
is not called into question, since past values of returns do not provide any
information to explain the current change in returns.
– Is there international convergence in GDP per capita?
Analyzing the convergence of GDP per capita is fundamental to studying
inequalities between nations. In particular, this question raises the issue of
poor countries catching up with rich ones. If we are interested in conditional
convergence, the Solow model can be used. In this model, the growth rate of a
country’s per capita income depends on the level at which this income is situated
in relation to the long-run equilibrium path of the economy. It is then possible
to estimate a relationship to explain the GDP growth rate between the current
date and the initial date by the level of GDP at the initial date. If the coefficient
assigned to the level of GDP is zero, this indicates an absence of convergence.
– What is the impact of the 35-hour work week on unemployment?
There are several ways to approach this question. One is to estimate a relationship
to explain the unemployment rate by working hours, by varying those working
hours. If the impact of the 35-hour work week on the unemployment rate
is neutral, the coefficient assigned to the duration variable should be similar,
whether the duration is 35 or 39 hours.
– Can higher inflation reduce unemployment?
This question is linked to a relationship that is widely studied in macroe-
conomics, namely, the Phillips curve, according to which there is a negative
relationship between the unemployment rate and the inflation rate. This rela-
tionship will be studied in Chap. 2 in order to determine whether inflation has a
beneficial effect on unemployment.
– Does their parents’ socio-occupational category have an impact on children’s
level of education?
Such a question can again be addressed by estimating a relationship between
children’s level of education and their parents’ socio-occupational category
(SOC). If the coefficient assigned to SOC differs with the SOC, this indicates
an impact of SOC considered on children’s level of education.
– Does air pollution have an impact on children’s health?
Answering this question first requires some way of measuring air pollution and
children’s health. Once these two measures have been established, the analysis
is carried out in a standard way, by estimating a relationship linking children’s
health to air pollution.
– What are the effects of global warming on economic growth?
As before, once the means of measuring global warming (e.g., greenhouse gas
emissions) has been found, a relationship between economic growth and this
variable must be estimated.

Having presented these examples and introductory points, let us formalize the
various concepts, such as the notions of model and variable in more detail.
1.2 Model and Variable 7

1.2 Model and Variable

An essential part of econometrics is the construction and estimation of models.

A model relates various variables, which are often economic quantities. It is a
formalized representation of a phenomenon or theory in the form of equations. We
speak of modeling, its aims being to understand, explain, and possibly predict the
phenomenon under study.
First of all, it is necessary to define the concept of model, as well as the types of
variables that can be involved in it.

1.2.1 The Concept of Model

A model is a simplified representation of reality which consists in representing a

phenomenon in the form of one or more equations. It makes it possible to specify
relationships between variables and to explain the way in which certain variables are
determined by others. Consider, for example, the Keynesian consumption function.
In accordance with Keynes’ (1936) “fundamental psychological law,” “men are
disposed, as a rule and on average, to increase their consumption as their income
increases, but not as much as the increase in their income.” According to this law,
consumption is an increasing function of income. By noting C consumption and Y
income, we have:

C = f (Y )
. (1.2)

where f is such that .f ' > 0. However, three types of functions, or models, are
compatible with the fundamental psychological law:

– A linear proportional model: .C = cY , with .0 < c < 1. The parameter c

designates the average propensity to consume . c = C Y , but also the marginal
propensity to consume, since . dC
dY = c. In line with this formulation, the variation
2
of the marginal propensity to consume as a function of income is zero: . ddYC2 = 0;
– A linear affine model: .C = cY + C0 , with .0 < c < 1 and .C0 > 0. The average
propensity to consume is now given by .c + CY0 , while the marginal propensity
2
remains equal to c. Furthermore, as before, we have: . ddYC2 = 0;
– A concave function: .C = f (Y) with ''
 .f < 0. Under these conditions, the 
marginal propensity to consume . f ' is lower than the average propensity . C
Y .
2
Because the function is concave, we have . ddYC2 < 0, reflecting the fact that
the variation in the marginal propensity to consume as a function of income is
negative.
8 1 Introductory Developments

As an approximation,3 the affine linear model is frequently used as a representa-

tion of the Keynesian consumption function. The model:

C = cY + C0
. (1.3)

thus represents the consumption behavior of agents from a Keynesian perspective. c

and .C0 are parameters (or coefficients) that must be estimated. In the next chapter,
we will see that the ordinary least squares (OLS) method is used to estimate these
coefficients; its purpose is to attribute values to the coefficients, i.e., to quantify the
relationship between consumption and income. As an example, suppose that the
application of this method yields the following estimates: 0.86 for the estimated
value of c and 200 000 for the estimated value of .C0 . We then have:

.Ĉ = 0.86Y + 200,000 (1.4)

where .Ĉ designates the estimated consumption.4 By virtue of Eq. (1.4), it appears
that the estimated value of c is positive: the relationship between C and Y is indeed
increasing. Furthermore, the value 0.86 of the marginal propensity to consume
allows us to write that, all other things being equal, an increase of one monetary
unit in income Y is accompanied by an average increase of 0.86 monetary units in
consumption C.

Remark 1.1 The model (1.3) has only one equation describing the relationship
between consumption and income. This is a behavioral equation in the sense that
behavior, i.e., household consumption decisions, depends on changes in income.
The models may also contain technological relationships: these arise, for example,
from constraints imposed by existing technology, or from constraints due to
limited budgetary resources. In addition to these two types of relationships—
behavioral and technological relationships—models frequently include identities,
i.e., technological accounting relationships between variables. For example, the
relationship .Y = C + I + G, where Y denotes output, C consumption expenditure,
I investment expenditure, and G government spending, frequently used in economic
models, is an identity. No parameter needs to be estimated.

3 Strictlyspeaking, a reading of the General Theory suggests that the concave function seems
closest to Keynes’ words; the affine form, however, is the most frequently chosen for practical
reasons.
4 The circumflex (or hat) notation is a simple convention indicating that this is an estimate (and not

an observed value). This convention will be adopted throughout the book.

1.2 Model and Variable 9

1.2.2 Different Types of Data

Having specified the model and in order to estimate it, it is necessary to have
data representative of the economic phenomena being analyzed. In the case of the
Keynesian consumption function, we need the consumption and income data for the
households studied. The main types of data are:

– Time series are variables observed at regular time intervals. For example, the
quarterly series of consumption of French households over the period 1970–2022
constitutes a time series in the sense that an observation of French household
consumption is available for each quarter between 1970 and 2022. The regularity
of observations is called the frequency. In our example, the frequency of the
series is quarterly. A time series can also be observed at annual, monthly, weekly,
daily, intra-daily, etc. frequency.
– Cross-sectional data are variables observed at the same moment in time and
which concern a specific group of individuals (in the statistical sense of the
term).5 An example would be a data set composed of the consumption of
French households in 2022, the consumption of German households in 2022,
the consumption of Spanish households in 2022, etc.
– Panel data are variables that concern a specific group of individuals and are
measured at regular time intervals. An example would be a data set composed
of the consumption of French households over the period 1970–2022, the con-
sumption of German households over the period 1970–2022, the consumption
of Spanish households over the period 1970–2022, etc. Panel data thus have a
double dimension: individual and temporal.

1.2.3 Explained Variable/Explanatory Variable

In the model representing the Keynesian consumption function, two variables are
involved: consumption and income. In accordance with relationship (1.3), income
appears to be the determinant of consumption. In other words, income explains
consumption. We then say that income is an explanatory variable and consumption
is an explained variable.
More generally, the variable we are trying to explain is called the explained
variable or endogenous variable or dependent variable. The explanatory variable
or exogenous variable or independent variable is the variable that explains the
endogenous variable. The values of the explained variable thus depend on the values
of the explanatory variable.
If the model consists of a single equation, there is only one dependent variable.
On the other hand, there may be several explanatory variables. For example,
household consumption can be explained not only by income, but also by the

5 Remember that an individual, or a statistical unit, is an element of the population studied.

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Woodcock sur Canapé, 871.
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Sunday, December —.

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Turnips, with Gravy, 967.
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Terrapin à la Baltimore, 396.
Broiled Grouse à la Pomeroy, 1390.
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Timbales à l’Ecossaise, 261.
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 Dinner.
Oysters, 298.
Sorrel, with Asparagus-tops, 41.
Celery, 290. Radishes, 292.
Boiled Halibut, sauce Hollandaise, 309, 160.
Tenderloin, Piqué à la Provençale, 518.
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Veal Cutlets à la Maréchale, 562.
Spinach à l’Anglaise, 940.
Oranges Glacées à la Geo. Renauldt, 1297.
Roast Quails, 834.
Lettuce Salad, 1057.
St. Honoré à la Rose Delmonico, 1212.
Swiss Cheese.
Coffee, 1349.

Monday, December —.

Breakfast.
Kidney Omelet, 463.
Broiled Ham, 753.
Tripe à la Créole, 545.
Potatoes à la Hanna, 1012.
Cream Renversée, 1252.

Luncheon.
Bass, Ravigote sauce, 352, 147.
 Breaded Mutton Chops, Tomato sauce, 643,
205.
Fried Sweet Potatoes, 993.
Marcella-wine Jelly à la Castellar, 1325.

Dinner.
Clams, 300.
Paysanne, 53.
Lyons Sausage, 286. Watercress, 1072.
Blackfish à la maître d’hôtel, 329.
Fried Chicken, Cream sauce, 301, 181.
Brussels Sprouts, 922.
Breast of Lamb à la Jardinière, 702.
Macaroni à l’Italienne, 956.
Roast Teal Ducks, with Hominy, 859, 1035.
Doucette Salad, 1052.
Rum Cake, 1229.
Coffee, 1349.

Tuesday, December —.

Breakfast.
Eggs en Panade, 436.
Codfish, Hollandaise sauce, 352, 160.
Veal Cutlets à la Philadelphia, 565.
Broiled Sweet Potatoes, 983.
Buckwheat Cakes, 1183.
 Luncheon.
Crabs, St. Laurent, 372.
Beef-tongue, sauce Piquante, 533.
Lima Beans, 952.
Japanese Salad, 1075.
Strawberry Tarts, 1117.

Dinner.
Blue Point Oysters, 298.
Mikado, 32.
Radishes, 292. Caviare, 281.
Red-snapper à la Bordelaise, 341.
Chicken, Sauté à la Marengo, 771.
Corn, Stewed with Butter, 964.
Coquilles of Sweetbreads à la Dreux, 621.
Brussels Sprouts, 922.
Roast Plover and Watercress, 865.
Barbe de Capucine Salad, 1038.
Apple Fritters, 1191.
Coffee, 1349.

Wednesday, December —.

Breakfast.
Omelet, with fine Herbs, 451.
Fried Scallops, Tomato sauce, 301, 205.
Lamb Steak, with Bacon, 716, 754.
 Potatoes, maître d’hôtel, 985.
Brioche Condé, 1203.

Luncheon.
Fried Porgies, Egg sauce, 320, 161.
Tendron of Veal, Morlaisienne, 635.
Risotto à la Milanaise, 1017.
Charlotte Russe, 1261.

Dinner.
Rockaway Oysters, 298.
Chicken à la Piémontaise, 63.
Lyons Sausage, 286. Olives.
Smelts à la Toulouse, 354.
Cromesquis of Chicken à la Reine, 765.
Stuffed Onions, 970.
Tenderloin, Piqué à la Portugaise, 517.
Cardons, with Marrow, 931.
Roast Grouse, with Watercress, 852.
Celery Salad, 1042.
Peach Pudding à la Richelieu, 1150.
Coffee, 1349.

Thursday, December —.

Breakfast.
Eggs à la Vanderbilt, 420.
 Haddock, Cream sauce, 352, 181.
Broiled Pig’s Feet à la Boston, 730.
Saratoga Potatoes, 1011.
German Pancake, 1188.

Luncheon.
Stuffed Deviled Lobster, 367.
Vol-au-Vent, Financière, 810.
Lamb-tongue Salad, 1056.
Apple Cake, 1211.

Dinner.
Clams, 300.
Cream of Lettuce, 87.
Sardines, 283. Celery, 290.
Oysters en Petites Caisses, 275.
Sweetbreads à la Duxelle, 608.
Cauliflower, Hollandaise, 923, 160.
Squabs en Crapaudine, 819.
Stuffed Cucumbers, 937.
Roast Canvas-back Ducks, Currant Jelly, 874,
1326.
Chicory Salad, 1045.
Vanilla Ice-cream, 1271.
Biscuits à la Livornaise, 1233.
Coffee, 1349.
 Friday, December —.

Breakfast.
Oyster Omelet, 452.
Broiled Salt Mackerel, 329.
Lamb Fries, Tomato sauce, 673.
Fried Potatoes, 993.
Preserved Raspberries, 1346.

Luncheon.
Pompano, with fine Herbs, 331.
Stewed Mutton, with Oyster-plant, 703.
Potatoes à l’Hollandaise, 999.
Apple Méringue Pie, 1103.

Dinner.
East River Oysters, 298.
Consommé au Spaghetti, 103.
Radishes, 292. Celery, 290.
Perch au Gratin, 356.
Tenderloin, Piqué à la Duchesse, 516.
Cêpes à la Bordelaise, 913.
Lamb Chops à la Clichy, 684.
French Peas.
Partridge, Piqué sur Canapé, 843.
Escarole Salad, 1055.
Plum Pudding, 1163.
Coffee, 1349.
 Saturday, December —.

Breakfast.
Barley and Cream.
Eggs à la Chipolata, 442.
Mutton Chops, Breaded, 643.
Lima Beans, with Cream, 952.
Malaga Grapes.

Luncheon.
Stuffed Oysters à la Mali, 386.
Breast of Veal à la Milanaise, 596.
Macédoine Salad, 1063.
Mince Pie, 1082.

Dinner.
Little Neck Clams, 300.
Purée of Partridge à la Destaing, 89.
Tomatoes, 292. Olives.
Boiled Codfish, Oyster sauce, 352.
Salmi of Pigeons à la Moderne, 870.
Spinach au Gras, 943.
Fillet of Venison, Port-wine sauce, 891.
Succotash, 1022.
Roast Turkey, 800.
Lettuce Salad, 1058.
Almond Cake, Glacé, 1208.
Coffee, 1349.
 Sunday, December —.

Breakfast.
Spanish Omelet, 472.
Fried Smelts, Tartare sauce, 301, 207.
Porterhouse Steak, 524.
Stewed Potatoes, 995.
Crême en Mousse au Café, 1253.

Luncheon.
Soft Clams à la Merrill, 389.
Breast of Turkey à la Robinson, 807.
Lobster Salad à la Plummer, 1062.
Pie à la Martha Washington, 1105.

Dinner.
Oysters, 298.
Cream of Celery, 71.
Radishes, 292. Mortadella, 287.
Sheep’s-head, maître d’hôtel, 329.
Cucumber Salad, 289.
Chartreuse of Partridge, 849.
Stuffed Tomatoes, 1023.
Sweetbreads à la Montglas, 615.
String Beans, 948.
Punch à la Cardinal, 1306.
Saddle of Venison, with Currant Jelly, 878.
Celery Salad, 1041.
 Neapolitan Ice-cream, 1292.
Petites Méringues à la Ch. C. Delmonico, 1249.
Camembert Cheese.
Coffee, 1349.

Monday, December —.

Breakfast.
Poached Eggs on Anchovy Toast, 404, 280.
Fish Balls, 347.
Beef-tongue, Piquante sauce, 533.
Mashed Potatoes au Gratin, 998.
Rice and Cream à la Croce, 1296.

Luncheon.
Oyster Patties, 387.
Salmi of Ducklings à l’Américaine, 826.
Sweet Potatoes Soufflées, 1010.
Cocoanut Pie, 1101.

Dinner.
Linn Haven Oysters, 298.
Consommé, Printanier Royale, 124.
Olives. Watercress, 1072.
Bass aux fines Herbes, 331.
Civet of Rabbit à la Française, 887.
Artichokes, Florentine, 903.
 Lamb Chops, maison d’or, 683.
Asparagus-tops à la Béchamel, 904, 154.
Roast Chicken, with Gravy, 755.
Doucette Salad, 1054.
Baked Apple Dumplings, 1122.
Coffee, 1349.

Tuesday, December —.

Breakfast.
Omelet, with Cheese, 469.
Cod’s Tongues à la Poulette, 351.
Chicken Livers Sautés au Madère, 707.
Potato Croquettes, 997.
Preserved Egg-plums, 1343.

Luncheon.
Haddock, with White Wine, 342.
Veal Cutlets à la Milanaise, 563.
Crab Salad, 1047.
Savarin à l’Anglaise, 1199.

Dinner.
Shrewsbury Oysters, 298.
Clear Green Turtle, 18.
Radishes, 292. Thon, 282.
Broiled Deviled Lobster, 364.
 Calf’s-head à la Vinaigrette, 640.
Spinach à la Vieille Mode, 941.
Suprême of Partridge à la Richelieu, 858.
Brussels Sprouts, 922.
Red-head Ducks, with Hominy, 876, 1035.
Lettuce Salad, 1057.
Pudding à la Porfirio Diaz, 1135.
Coffee, 1349.

Wednesday, December —.

Breakfast.
Scrambled Eggs, with Mushrooms, 405.
Oysters en Brochette au Petit Salé, 385.
Mutton Hash au Gratin, 653.
Stewed Corn, 964.
French Pancake, 1186.

Luncheon.
Matelote of Eels, 332.
Curry of Chicken à l’Indienne, 792.
Cauliflower, with Butter, 925.
Omelet Soufflée, 474.

Dinner.
Clams, 300.
Purée Parmentier, 44.
Watercress, 1072. Mortadella, 1087.
Frogs à l’Espagnole, 401.
Broiled Tenderloin à la Trianon, 507.
French Peas.
Sweetbreads à la Duxelle, 608.
Lima Beans, 952.
Roast Grouse sur Canapé, 852.
Doucette and Beet-root Salad, 1053.
Bread Pudding, 1132.
Coffee, 1349.

Thursday, December —.

Breakfast.
Omelet, with Peas, 459.
Broiled Sardines on Toast, 403.
Broiled Venison Steak, Currant Jelly, 884.
Potatoes, Hollandaise, 999.
Stewed Prunes à la Dufour, 1330.

Luncheon.
Flounders, maître d’hôtel, 329.
Beefsteak Pie à l’Américaine, 488.
Stuffed Cabbage, 919.
Green-gage Pie, 1093.
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Doxie Rockaway Oysters, 298.
Consommé Impérial, 111.
Olives. Celery, 290.
Red-snapper à l’Icarienne, 336.
Croquettes of Lamb, Béarnaise sauce, 679,
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Turban of Chicken à la Cleveland, 791.
Peas, with Cream, 980.
Foies-Gras en Bellevue.
Woodcock sur Canapé, 871.
Celery, 1041.
Apple Charlotte, 1167.
Coffee, 1349.

Friday, December —.

Breakfast.
Lobster Omelet, 454.
Boiled Codfish, Hollandaise sauce, 352, 160.
Broiled Calf’s Liver and Bacon, 584.
Fried Egg-plant, 907.
Brioches Fluttes, 1204.

Luncheon.
Oysters à la Baltimore, 388.
Sausages à l’Anglaise, 736.
 Fried Sweet Potatoes, 993.
Custard Pie, 1100.

Dinner.
Clams, 300.
Chicken à la Turque, 69.
Radishes, 292. Lyons Sausage, 286.
Matelote of Eels, 332.
Ballotin of Squab à l’Italienne, 818.
Stuffed Egg-plant, 909.
Tenderloin, Marinated, Russian sauce, 511.
String Beans, 948.
Roast Veal, 585.
Chicory Salad, 1045.
Sago Pudding, 1140.
Coffee, 1349.

Saturday, December —.

Breakfast.
Hominy and Cream, 1034.
Ham and Eggs, 412, 753.
Broiled Deviled Mutton Kidneys, 715.
Fried Potatoes, 993.
Baked Apples, 1124.
 Luncheon.
Mussels à la Marinière, 378.
Garnished Sourkrout, 924.
Beef Salad, 1039.
Jamaica-rum Jelly, 1320.
Gingerbread, 1213.

Dinner.
Cherry-stone Oysters, 298.
Menestra, 36.
Olives. Tomatoes, 288.
Lobster Croquettes, sauce Aurore, 365, 182.
Mignons Filets, Bohémienne, 513.
Macaroni à l’Italienne, 956.
Chicken Vol-au-Vent, with Mushrooms, 812.
French Peas.
Roast Quails, 834.
Escarole Salad, 1055.
Baba au Madère, 1217.
Coffee, 1349.

Sunday, December —.

Breakfast.
Omelet Raspail, 467.
Halibut Steaks, maître d’hôtel, 310.
Minced Beef à l’Ecarlate, 500, 247.
 Sweet Potatoes, Hollandaise, 999.
Apricot Preserves, 1340.

Luncheon.
Lobster à la Newburg, 359.
Broiled Chicken, with Bacon, 756.
Potatoes, Julienne, 1013.
Timbales à la Schultze, 263.
Apple Méringue Pie, 1103.

Dinner.
Blue Point Oysters, 298.
Consommé Duchesse, 125.
Celery, 290. Radishes, 292.
Fillet of Sole au Gratin, 319.
Coquilles of Chicken à l’Anglaise, 271.
Tomatoes à la Bock, 1026.
Tenderloin, Piqué à la Parisienne, 516, 495.
Beans Panachées, 950.
Punch à la Lalla Rookh, 1308.
Roast Partridges, with Watercress, 843.
Lettuce Salad, 1057.
St. Honoré à la Rose Delmonico, 1212.
Roquefort Cheese.
Coffee, 1349.
 Monday, December —.

Breakfast.
Eggs à la Bonne Femme, 432.
Fried Frost-fish, 301.
Mutton Chops, sauce Colbert, 647, 190.
Potatoes, Duchesse, 1006.
Whipped Cream à la Vanille, 1254.

Luncheon.
Stuffed Deviled Crabs, 370.
Minced Veal à la Biscaënne, 576.
Sorrel au Gras, 974.
Rhubarb Tarts, 1112.

Dinner.
Parker Bay Oysters, 298.
Jardinière, 28.
Olives. Mortadella, 287.
Red-snapper à la Vénitienne, 338.
Sweetbreads au Salpicon, 605.
Stuffed Lettuce, 953.
Chicken à la Maryland, 785.
Stewed Tomatoes, 1027.
Roast Beef, 527.
Watercress Salad, 1072.
Raspberry Water-ice, 1281.
Fancy Almond Cakes, 1239.
Coffee, 1349.
 Tuesday, December —.

Breakfast.
Oatmeal and Cream.
Sausage Omelet, 465.
Hamburg Steak, Russian sauce, 526.
Potatoes, Windsor, 1008.
Small Brioches, 1202.

Luncheon.
Oysters à la Pompadour, 384.
Stewed Veal, Marengo, 624.
Sweet Potatoes, Soufflées, 1010.
Pumpkin Pie, 1099.

Dinner.
Doxie Rockaway Oysters, 298.
Mock Turtle, 17.
Radishes, 292. Thon, 282.
Smelts, Béarnaise, 353.
Saddle of Venison, Port Wine sauce, 878, 891.
Purée of Chestnuts, 131.
Sweetbreads, with Asparagus-tops, 607.
Lima Beans, 952.
Roast Ducklings, 824.
Celery Salad, 1042.
Pudding à la U. S. Grant, 1159.
Coffee, 1349.
 Wednesday, December —.

Breakfast.
Eggs au Soleil, 415.
Fried Yellow Perch, 301.
Pig’s Feet à la St. Hubert, 727.
Potato Croquettes, 997.
Apples and Rice, 1169.

Luncheon.
Black Bass, with White Wine, 342.
Sirloin Steak à la Bordelaise, 491.
Cauliflower au Gratin, 926.
Plum Pie, 1094.

Dinner.
Rockaway Oysters, 298.
Spaghetti, with Tomatoes, 56.
Celery, 290. Caviare, 281.
Broiled Pompano, maître d’hôtel, 329.
Cucumber salad, 289.
Hashed Turkey à la Crême, 804.
Okras, Sautés à la Créole, 1031.
Lamb Chops à la Masséna, 687.
French Peas, with Lettuce, 977.
Roast Grouse, with Watercress, 852.
Chicory au Chapon-salad, 1046.
Méringues à l’Helvétienne, 1251.
 Coffee, 1349.

Thursday, December —.

Breakfast.
Eggs à la Paysanne, 433.
Tripe à la Lyonnaise, 548.
Mignons Filets à la Provençale, 509, 518.
Hashed Potatoes au Gratin, 1004.
Wheat Cakes, 1184.

Luncheon.
Lobster Croquettes à la Victoria, 365, 208.
Stewed Beef à la Dufour, 541.
Timbales Lagardère, 809.
Boiled Apricot Dumplings, 1126.

Dinner.
Sound Oysters, 298.
Cream of Chicken, 82.
Radishes, 292. Bologna Sausage, 286.
Frogs à la Poulette, 399.
Pillau of Chicken à la Turque, 782.
Stewed Corn, 963.
Broiled Partridge, with Bacon, 844, 754.
Spaghetti à l’Italienne, 960.
Roast Saddle of Mutton, 664.
 Escarole Salad, 1055.
Cabinet Pudding à la Sadi-Carnot, 1164.
Coffee, 1349.

Friday, December —.

Breakfast.
Omelet Mexicaine, 473.
Fried Black-bass, 301.
Sausages à l’Anglaise, 736.
Saratoga Potatoes, 1011.
Peach Marmalade, 1331.

Luncheon.
Picked-up Codfish, 346.
Beefsteak Pie à l’Américaine, 488.
Lobster Salad, 1061.
Rice and Cream à la Croce, 1296.

Dinner.
Oak Island Oysters, 298.
Bisque of Clams, 8.
Sardines, 283. Celery, 290.
Bouille-à-Baisse à la Marseillaise, 340.
Broiled Tenderloin à la Béarnaise, 492.
Tomatoes à la Reine, 1024.
Pigeon Cutlets à la Victoria, 815.
 Fried Egg-plant, 907.
Roast Quails on Toast, 834.
Celery Salad, 1041.
Vanilla Ice-cream, 1271.
Petites Bouchées des Dames, 1237.
Coffee, 1349.

Saturday, December —.

Breakfast.
Eggs à la Valencienne, 421.
Broiled Sardines on Toast, 403.
Lamb Kidneys, Sautés à l’Italienne, 663.
Baked Potatoes.
Marcella-wine Jelly à la Castellar, 1325.

Luncheon.
Scallops à la Brestoise, 392.
Squabs à l’Américaine, 820.
Cauliflower au Gratin, 926.
Mince Pie, 1082.

Dinner.
Clams, 300.
Consommé Napolitaine, 127.
Radishes, 292. Caviare, 281.
Haddock, Cream sauce, 352, 181.
 Mignons Filets, with Marrow, 510.
Fried Egg-plant, 907.
Duck à la Rouennaise, 825.
Celery, with Cream, 929.
Roast Lamb, Mint sauce, 585, 169.
Chicory Salad, 1045.
Biscuits Tortoni, 1287.
Coffee, 1349.

Sunday, December —.

Breakfast.
Eggs à la Hyde, 448.
Fried Frogs’ Legs, Tomato sauce, 400, 205.
Hashed Chicken, with Cream, 804.
Fried Oyster-plant, 1021.
Rice à la Condé, 1181.

Luncheon.
Stewed Terrapin à la Maryland, 397.
Broiled Red-head Ducks, Currant Jelly, 876,
1326.
Risotto à la Milanaise, 1017.
Japanese Salad, 1075.
Raspberry Tarts, 1118.
 Dinner.
Small Rockaway Oysters, 298.
Chicken, with Leeks, 68.
Celery, 290. Olives.
Stuffed Deviled Lobster, 367.
Salmi of Woodcock à la Gastronome, 842.
French Peas.
Sweetbreads à la Soubise, 606.
Tomatoes à la Bock, 1026.
Punch à la Lorenzo Delmonico, 1303.
Roast Grouse à la Sam Ward, 853.
Celery, Mayonnaise Salad, 1042.
Macédoine à la Cavour, 1298.
Biscuits Ambroisienne, 1234.
Camembert Cheese.
Coffee, 1349.

Monday, December —.

Breakfast.
Hominy, with Cream, 1034.
Eggs à l’Aurore, 444.
Broiled Venison Steaks, maître d’hôtel, 879,
145.
Fried Potatoes, 993.
Crême Renversée, 1252.
 Luncheon.
Canapé Lorenzo, 391.
Mignons of Lamb à la Montebello, 1360, 249.
Brussels Sprouts, with Butter, 922.
Charlotte Russe, 1261.

Dinner.
Massachusetts Bay Oysters, 298.
Purée Faubonne, 46.
Celery, 290. Sardines, 283.
Red-snapper à la Bordelaise, 341.
Quails Braised, Celery sauce, 836.
Lamb Chops à la Maintenon, 685.
Cauliflower, Hollandaise, 925, 160.
Roast Plover sur Canapé, 865.
Doucette Salad, 1054.
Cocoanut Pudding, 1147.
Coffee, 1349.

Tuesday, December —.

Breakfast.
Smoked Beef Omelet, 461.
Stewed Oysters à la Baltimore, 388.
Broiled Lamb Chops, with Bacon, 647, 754.
Potatoes en Paille, 1014.
Preserved Strawberries, 1345.
 Luncheon.
Scallops Brestoise, 392.
Soles à la Horly, 321.
Blanquette of Veal, with Nouilles, 552.
Oyster-plant à la Poulette, 1019.
Lobster Salad à la Plummer, 1062.
Rice and Cream à la Croce, 1296.

Dinner.
Chincoteague Oysters, 298.
Green Turtle, 16.
Anchovies, 284. Watercress, 1072.
Boned Deviled Smelts, sauce Tartare, 353, 207.
Boiled Turkey à l’Anglaise, 795.
French Peas.
Tenderloin à la Hussard, 519.
Stuffed Onions, 970.
Roast Saddle of Venison, 878.
Romaine Salad, 1064.
Omelet Soufflée, 474.
Coffee, 1349.
 CHRISTMAS.

Wednesday, December —.

Breakfast.
Eggs à l’Aurore, 444.
Broiled Salt Mackerel, 329.
Porterhouse Steak, 524.
Potatoes, Château, 1009.
Crême en Mousse au Maraschino, 1257.

Luncheon.
Lobster en Chevreuse, 362.
Chicken, Sauté with Tarragon, 774.
Broiled Sweet Potatoes, 983.
Pie à la Martha Washington, 1105.
Biscuits Glacés, 1286.

Dinner.
Small Rockaway Oysters, 298.
Consommé Printanier Royale, 124.
Celery, 290. Radishes, 292.
Bouchées à la Reine, 270.
Terrapin à la Baltimore, 396.
Filets Mignons à la Bayard, 509, 231.
Stuffed Tomatoes, à la Reine, 1024.
Suprême of Partridge à la Périgueux, 850.
French Peas, with fresh Butter, 978.
 Stuffed Deviled Lobster, 367.
Champagne Punch, 1307.
Canvas-back Ducks, with Currant Jelly, 874,
1326.
Lettuce and Egg Salad, 1058.
Nougat Pyramid, 1267.
Plombière à la Hamilton, 1370.
Petites Bouchées des Dames à la Mme. Astor,
1238.
Sweet Macaroons, 1210.
Lady-fingers, 1231. Biscuits Richelieu, 1232.
Coffee, 1349.
Punch à la Czarina, 1312—to be served at 10 P.
M.

Thursday, December —.

Breakfast.
Spanish Omelet, 472.
Fried Frost-fish, 301.
Hamburg Steak, Madeira sauce, 526, 185.
Potatoes, Lyonnaise, 991.
Prunes à la Général Dufour, 1330.

Luncheon.
Canapé Lorenzo, 391.
Broiled Calf’s Liver and Bacon, 584.
Anchovy Salad, 1037.
 Rice Pudding à l’Orange, 1130.

Dinner.
Mill Pond Oysters, 298.
Cream of Barley, 77.
Tomatoes, 288. Caviare, 281.
Stuffed Deviled Crabs, 370.
Croustade of Kidneys, with Mushrooms, 680.
Spinach, with Eggs, 940.
Broiled Tenderloin and Watercress, 503.
Stuffed Peppers, 975.
Roast Grouse, 852.
Escarole Salad, 1055.
Kirsch Omelet, 476.
Coffee, 1349.

Friday, December —.

Breakfast.
Scrambled Eggs, with Asparagus-tops, 406.
Cod’s Tongues, black Butter, 349.
Hashed Turkey en Bordure, 805.
Broiled Sweet Potatoes, 983.
Baked Apples, 1124.

Luncheon.
Porgies, Tomato sauce, 301, 205.