Login with Facebook

Introduction to Identification and Causal inferences

It is natural for human beings to draw conclusions and link them to something else. And in economics, both consumers and manufacturers are seen as decision-makers who rely on certain conditions to take specific directions. It is always assumed that one thing leads to the liking or disliking of the other.

Identification and causal inferences are two of the most critical aspects of modern microeconomics. Whether it is for individual or firm decisions or academic studies, these two aspects have always been used to ascertain microeconomic models. We have seen the importance of economic models, and it continues to be a hotly discussed subject. In this article, we shall be introducing you to identification and causal inferences as part of microeconomic model studies.

Causal inference

Causal inference can be described as the process of drawing conclusions about a causal relationship based on the evidence in the circumstances surrounding the incident. As stated above, we all draw a conclusion and made decisions based on the best outcome. Causal means something that stirs the happening of another. For instance, consumers make decisions based on the most beneficial outcome. A family may have been saving for a vacation, but they may be faced with another challenge of buying a new car when the time comes. And since scarcity is something that affects all human beings, they will make the decision based on what makes them more satisfied.

Causal inferences help people make conclusions, sometimes on assumptions, about the connecting causal effect on a specified condition. Sometimes people confuse causal inference and inference of association to mean more or less the same. However, they are mainly differentiated by the fact that the former critically looks at the effect variable's response when the cause is altered. Also, causal inference is a good example of causal reasoning.

Economics is seen as a scientific study of economic behavior. It takes into consideration how consumers and producers react to different conditions that affect economic growth and development. In other words, we can say that economics studies human psychology by analyzing consumer and producer behaviors. We can always conclude that people must interact under different circumstances to make the world a better place. There would be no moving forward if these links were not there. A single consumer may not make such a big difference in an economy, but collectively they will create a huge effect.

Subjects such as health, social sciences, and behavioral sciences are motivated by causal and not associational. For instance, a medical team could be seeking to establish how efficient a certain drum may be to a population. They will mostly consider the reactions from users, and how they have been benefiting from it. In this case, the drug will be seen as efficient if it leads to the desired results. Hence, there is a causal reason to pursue a specified line of action. Also, a question such as whether data carries enough evidence to implicate an employer for hiring discrimination or not? If there is enough data, it brings out the desired evidence that a specific line of action leads to a specific reaction. Or, what are the chances that bringing a new product to the market will be received passively?

All these are causal questions. They demand some form of data-generating process. However, data alone, or distributions that govern the data is not enough to create a computational situation for the right answers. Causal questions seek to dig the underlying truth the links one thing to another. Surprisingly, much of the conceptual framework and algorithm tools necessary for solving such issues are now well established. However, they are not very much known to researchers who could apply them in real-life situations. The main reason is their educational nature. To systematically solve causal problems, one is expected to have a certain extension in mathematical language and statistics. This means studying causal inference is not a general subject that anyone can take on and succeed. It calls for someone with dipper understanding of mathematics and statistics. This not only goes for the researcher but also for the person trying to interpret the data. If you are not well equipped with mathematical knowledge, understanding come aspects causal inferences will not be possible. Besides, mainstream literature and education do not emphasize these extensions, which makes it even harder to study them. This is large sections of statistical research in communities that do not easily appreciate and benefit from causal analysis results. Over the past two decades, there have been various researches of these nature, which do not seem to matter to many, even though they are very crucial for different aspects so human existence. The causal analysis makes economists and other people understand the reasons behind certain decisions and make more informed plans for their futures.

Testing for statistics and economics

Statistics and economic are two subjects that work with closest ties. When a government wants to make a new fiscal or monetary policy, they look at data and effects of previous decisions. If, for instance, there is a major recession within an economy, it becomes vital for policymakers to know where to begin in their search for a solution.

In this case, causality is mostly tested through regression analysis. There are many methods that can be applied in identifying the actual casualty from spurious correlations. Economic analysts must establish the best method to determine the most appropriate path to follow. Economist construction regression modes must first distinguish the causal relation direction by looking at a specified economic theory. Note that causality studies are theory-driven economics. The importance of models in establishing and proving theories can never be overemphasized.

For instance, it is determined that the amount of rainfall with a specified period led to increased sales. This could be something the consumers need a lot during the rainy season, like umbrellas. This will then mean the manufacturer should adjust its production level to ensure there is enough supply on the market. Also, theory (broadly construed) shows that rainfall can affect pricing. If demand is high, there are higher chances of suppressing supply, which leads to an increase in prices. These are normal occurrences with economies, and they are the wheels that drive economic growth and development.

 After establishing the causal direction, the economist may use the instrument variables (IV) method to eliminate any effects of reverse causation. They do this by introducing the role of the other variables (instruments) that are automatically affected by the dependent variable. This means they have to consider that something else could be the reason why the results don't come out as expected. Then comes the final step of the regression analysis in which economists look at the time precedence when choosing the right model specification. Time is a critical factor, considering that economic development goes through different cycles. The right way to get desired results, therefore, involves setting the analysis on a specific time frame. It becomes crucial to observe everything based on the real results of what happened within the given time and then compare to what might happen.

Causality can be considered based on its probabilistic view as well. In this case, economic analysts used the assumption that causes must come earlier in time than their effects. There will be no effect if the cause has been established earlier in time. It is crucial to set the right timing because then, it will lead to the right decisions. As stated in economics and statistics require some math knowledge when describing and using causal inferences. Time is one factor used in the development of numerical evidence. As such, analysts may use variables that represent phenomena happening in a former time as the independent variable, as well as developing econometric tests for causality – like the Granger-causality tests- as applied in a time-series study.

Another very important step the analyst must take is the inclusion of other regressors. These come in to make sure that the confounding variables are not the cause for the causing regressor's appearance spuriously. However, when considering the areas suffering from multicollinearity issues, like in macroeconomics, it is principally impossible to add all confounding factors. This is the main reason why econometric models are susceptible to common-cause fallacy. In recent times, movement-oriented econometrics has made the use of natural experiments and quasi-experimental research designs quite popular in addressing the issue of spurious correlation.

Economic identification

Economic identification is just meaning features or model components being determined in unique ways from an observable population, which creates data. There are many variations of the term identification now appearing in the modern economical literature. However, they all come down to the idea of building something noticeable and processes that become apparent in the study of econometric models. Such terms include Bayesian identification, causal identification, essential identification, local identification, point identification, set identification, and many others.

To understand what identification truly means, it is vital to consider some historical aspects of the same. We can go ahead and isolate, hence identifying the impact of one variable to another, but it is critical to understand the thought of 'ceteris paribus,' which means holding other things equal. This concept was formally applied to an economic analysis by Alfred Marshall (1890). Or rather, he may have been the first person to use the term. But Perky (1990) states that the use of ceteris paribus as a term in economics dates way back to William Petty (1662).

Phillip Wright (1915), shares that what seemed to be an upward sloping demand curve for pig iron was the rail supply curve that originated from the demand curve, hence, presenting the first textbook example of identification issues in economics. While many who looked at the curve believed it was for the consumers seeking the commodity, Wright identified as suppliers delivering the good. Letter Sewall, Philips' came up with the idea of using causal path diagrams in statistics. Hence Sewall Wright (1925) used his own discovering in the construction of instrumental variables estimator. However, it was easy to already to use ordinary least squares in identifying exogenous regressors.

Apart from the two Wrights, Holbrook (1927) and Elmer J. Working (1927) published their early papers in relation to this subject. They both mentioned the issues of statistical demand curves. It was Holbrook, whom the Working-Leser Engel curve was named after. Other analysts followed the same idea, including Jan Tinbergen (1930), who proposed the indirect least squares estimation, though his work does not appear very useful in solving identification issues. Trygve Haavelmo (1943), and Franklin Fisher (1966) are among the most recent analysts in this area. Their work most dwelt on the exclusion restrictions for resolving identification in a simultaneous system. Nevertheless, identification could also emerge from restrictions on the covariance matrix or error. Sometimes it could also come from the combination of the two.

The general definition of Identification in econometrics

Take that P stands the real distribution of observed data X. which is shown as P= {Pθ: θ ∈ Θ}, as a model for the distribution of this observed data. It can be assumed that P ∈ P = {Pθ: θ ∈ Θ}. Its simple terms, we are assuming that there is a correct specification of the model so that we can notice some θ ∈ Θ, in which Pθ = P. Our interest is majorly on θ or another function f of θ.

If we already know that the distribution of observed data P ∈P. And because this model is correctly specified by assumption, we know priori, that the existence of θ ∈ Θ such that Pθ = P is eminent. It is hard however to differentiate all θ ∈ Θ linked to all θ∗ ∈ Θ such that Pθ∗ = θ ∈ Θ such that Pθ = P. We already know P alone, hence we can conclude that θ ∈Θ0(P).

In this case, model P comes identified as a 'structural' model for the supply of observed data. A structural model is used because all the statistics describe the data, but they don't assist in understanding the mechanism. Identification, just like causal inferenceEconomic identification, is majorly identified through Linear regression.

Author: James Hamilton

Need a custom

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Cognitive Computing- How does Cognitive Computing work?
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Demographic trends and how they affect Economic Growth
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Everything you need to know about short-term memory
Economic and Policy Impacts of Demographics
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Factors of Demographic Data Collection
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How Relativism Promotes Pluralism and Tolerance
How to use the audience’s feedback to write a news report
History of silent cinema
How news report can be strengthened through multimedia
Introduction to Population Problems
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Magnetoencephalography (MEG)
Microeconomic Analysis to the Demand for Labor
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Objections to utilitarianism
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Population Demographics
Recurrent neural networks (RNN) for speech detection
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Stochastic optimization methods in deep learning?
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
The climate change denial
The techniques of basic cinematography
The Endosymbiotic Theory
The Role of Internal Audit in Corporate Risk Management
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What are the linear models in machine learning?
What is Convolutional Neural Network
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
How to use quotes in your news reports?
How news report can be strengthened through multimedia
History of silent cinema
How to use the audience’s feedback to write a news report
How Relativism Promotes Pluralism and Tolerance
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
Introduction to Population Problems
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
The Endosymbiotic Theory
The techniques of basic cinematography
The climate change denial
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?
What is TES-Transcranial electrical stimulation?
What is Relativism?
What is Vaccine skepticism, and what to do about it?
What happens in the brain when learning?
What is the deep neural network?
What is Convolutional Neural Network
What are the linear models in machine learning?