Applied Econometrics with R:

Package Vignette and Errata

Christian Kleiber Achim Zeileis

Universität Basel Universität Innsbruck

Abstract
“Applied Econometrics with R” (Kleiber and Zeileis 2008, Springer-Verlag, ISBN 978-
0-387-77316-2, pp. vii+222) is the first book on applied econometrics using the R system
for statistical computing and graphics (R Core Team 2019). It presents hands-on exam-
ples for a wide range of econometric models, from classical linear regression models for
cross-section, time series or panel data and the common non-linear models of microecono-
metrics, such as logit, probit, tobit models as well as regression models for count data,
to recent semiparametric extensions. In addition, it provides a chapter on programming,
including simulations, optimization and an introduction to R tools enabling reproducible
econometric research. The methods are presented by illustrating, among other things, the
fitting of wage equations, growth regressions, dynamic regressions and time series models
as well as various models of microeconometrics.
The book is accompanied by the R package AER (Kleiber and Zeileis 2019) which
contains some new R functionality, some 100 data sets taken from a wide variety of
sources, the full source code for all examples used in the book, as well as further worked
examples, e.g., from popular textbooks.
This vignette provides an overview of the package contents and contains a list of errata
for the book.

Keywords: econometrics, statistical software, R.

1. Package overview

1.1. R code from the book

The full R code from the book is provided in the demos for the package AER. The source
scripts can be found in the demo directory of the package and executed interactively by calling
demo(), as in

R> demo("Ch-Intro", package = "AER")

One demo per chapter is provided:

• Ch-Intro (Chapter 1: Introduction),

• Ch-Basics (Chapter 2: Basics),
• Ch-LinearRegression (Chapter 3: Linear Regression),
2 AER: Package Vignette and Errata

• Ch-Validation (Chapter 4: Diagnostics and Alternative Methods of Regression),

• Ch-Microeconometrics (Chapter 5: Models of Microeconometrics),

• Ch-TimeSeries (Chapter 6: Time Series),

• Ch-Programming (Chapter 7: Programming Your Own Analysis).

This list of demos is also shown by demo(package = "AER").

The same scripts are contained in the tests directory of the package so that they are auto-
matically checked and compared with the desired output provided in .Rout.save files.
To make the code fully reproducible and to avoid some lengthy computations in the daily
checks, a few selected code chunks are commented out in the scripts. Also, for technical
reasons, some graphics code chunks are repeated, once commented out and once without
comments.

1.2. Data sets

The AER package includes some 100 data sets from leading applied econometrics journals and
popular econometrics textbooks. Many data sets have been obtained from the data archive
of the Journal of Applied Econometrics and the (now defunct) data archive of the Journal of
Business & Economic Statistics (see note below). Some of these are used in recent textbooks,
among them Baltagi (2002), Davidson and MacKinnon (2004), Greene (2003), Stock and
Watson (2007), and Verbeek (2004). In addition, we provide all further data sets from Baltagi
(2002), Franses (1998), Greene (2003), Stock and Watson (2007), and Winkelmann and Boes
(2009). Selected data sets from Franses, van Dijk, and Opschoor (2014) are also included.
Detailed information about the source of each data set, descriptions of the variables included,
and usually also examples for typical analyses are provided on the respective manual pages.
A full list of all data sets in AER can be obtained via

R> data(package = "AER")

In addition, manual pages corresponding to selected textbooks are available. They list all
data sets from the respective book and provide extensive code for replicating many of the
empirical examples. See, for example,

R> help("Greene2003", package = "AER")

for data sets and code for Greene (2003). Currently available manual pages are:

• Baltagi2002 for Baltagi (2002),

• CameronTrivedi1998 for Cameron and Trivedi (1998),

• Franses1998 for Franses (1998),

• Greene2003 for Greene (2003),

• StockWatson2007 for Stock and Watson (2007).

 Christian Kleiber, Achim Zeileis 3

• WinkelmannBoes2009 for Winkelmann and Boes (2009).

1.3. New R functions

AER provides a few new R functions extending or complementing methods previously available
in R:

• tobit() is a convenience interface to survreg() from package survival for fitting tobit
regressions to censored data. In addition to the fitting function itself, the usual set of
accessor and extractor functions is provided, e.g., print(), summary(), logLik(), etc.
For more details see ?tobit.

• ivreg() fits instrumental-variable regressions via two-stage least squares. It provides

a formula interface and calls the workhorse function ivreg.fit() which in turn calls
lm.fit() twice. In addition to the fitting functions, the usual set of accessor and
extractor functions is provided, e.g., print(), summary(), anova(), etc. For more
details see ?ivreg, ?ivreg.fit, and ?summary.ivreg, respectively.

• dispersiontest() tests the null hypothesis of equidispersion in Poisson regressions

against the alternative of overdispersion and/or underdispersion. For more details see
?dispersiontest.

2. Errata and comments

Below we list the errors that have been found in the book so far. Please report any further
errors you find to us.
We also provide some comments, for example on functions whose interface has changed.

• p. 5–9, 46–53: There are now very minor differences in the plots pertaining to Example 2
(Determinants of wages) in Chapter 1.1 and Chapter 2.8 (Exploratory Data Analysis
with R) due to a missing observation. Specifically, the version of the CPS1985 data
used for the book contained only 533 observations, the original observation 1 had been
omitted inadvertently.

• p. 38, 48, 85: By default there is less rounding in calls to summary() starting from
R 3.4.0.

• p. 63–65, 130, 143: The function linear.hypothesis() from the car package is now
defunct, it has been replaced by linearHypothesis() starting from car 2.0-0.

• p. 85–86: Due to a bug in the summary() method for “plm” objects, the degrees of
freedom reported for the F statistics were interchanged and thus the p values were not
correct. Therefore, the p values printed in the book at the end of summary(gr_fe) and
summary(gr_re) are not correct, they should both be < 2.22e-16. Using plm 1.1-1 or
higher, the code produces the correct output. Also the degrees-of-freedom adjustment
in the p values for the coefficient tests in summary(gr_re) were corrected.
4 AER: Package Vignette and Errata

• pp. 88–89: As of version 1.3-1 of the plm package, summaries of “pgmm” objects provide
robust standard errors by default. The output presented on pp. 88–89 is still available,
but now requires summary(empl_ab, robust = FALSE).
Also, the formula interface for pgmm() has changed: as of version 1.7-0 of the plm
package, the function dynformula() is deprecated. Instead, lags should now be specified
via the package’s lag() function. In addition, instruments should now be specified via
a two-part formula.
Using the new interface, the function call for the Arellano-Bond example is

R> empl_ab <- pgmm(log(emp) ~ lag(log(emp), 1:2) + lag(log(wage), 0:1)

+ + log(capital) + lag(log(output), 0:1) | lag(log(emp), 2:99),
+ data = EmplUK, index = c("firm", "year"),
+ effect = "twoways", model = "twosteps")

• p. 92: Exercise 6 cannot be solved using PSID1982 since that data set only contains
a cross-section while Hausman-Taylor requires panel data. A panel version has been
available in the plm package under the name Wages; we have now added PSID7682
to AER for completeness (and consistent naming conventions). Use PSID7682 for the
exercise.

• pp. 98–100: R only provides a function dffits() but not dffit() as claimed on p. 99.
Somewhat confusingly the corresponding column in the output of influence.measures()
(as shown on p. 100) is called dffit by R (rather than dffits).

• p. 141: The log-likelihood for the tobit model lacked a minus sign. The correct version
is X  X
ℓ(β, σ 2 ) = log φ{(yi − x⊤
i β)/σ} − log σ + log Φ(−x⊤i β/σ).
yi >0 yi =0

• p. 149: The standard error (and hence the corresponding z test) of admin|manage in
the output of coeftest(bank_polr) is wrong, it should be 1.4744. This was caused by
an inconsistency between polr() and its vcov() method which has now been improved
in the MASS package (≥ 7.3-6).

• p. 167: The truncation lag parameter in the output of kpss.test(log(PepperPrice[,

"white"])) is wrong, it should be 5 instead of 3, also leading to a somewhat smaller
test statistic and larger p value. This has now been corrected in the tseries package (≥
0.10-46).

• p. 169: The comment regarding the output from the Johansen test is in error. The
null hypothesis of no cointegration is not rejected at the 10% level. Nonetheless, the
table corresponding to Case 2 in Juselius (2006, p. 420) reveals that the trace statistic is
significant at the 15% level, thus the Johansen test weakly confirms the initial two-step
approach.

• p. 179: For consistency, the GARCH code should be preceded by data("MarkPound").

• p. 192: The likelihood for the generalized production function was in error (code and
computations were correct though).
 Christian Kleiber, Achim Zeileis 5

The correct likelihood for the model is

n 
1 εi 1 + θYi
Y   
L= φ · .
i=1
σ σ Yi

giving the log-likelihood

n
X n
X
ℓ= {log(1 + θYi ) − log Yi } − n log σ + log φ(εi /σ).
i=1 i=1

• p. 205: The reference for Henningsen (2008) should be:

Henningsen A (2008). “Demand Analysis with the Almost Ideal Demand Sys-
tem in R: Package micEcon,” Unpublished. URL http://CRAN.R-project.
org/package=micEcon.

Note: Currently, all links on manual pages corresponding to data sets taken from the Jour-
nal of Business & Economic Statistics (JBES) archive are broken (data sets MarkPound, and
RecreationDemand). The reason is the redesign of the American Statistical Association (ASA)
website, rendering the old ASA data archive nonfunctional. The ASA journals manager cur-
rently appears to supply data on a case-by-case basis. The problem awaits a more permanent
solution.

References

Baltagi BH (2002). Econometrics. 3rd edition. Springer-Verlag, New York. URL https:
//www.springer.com/us/book/9783662046937.

Cameron AC, Trivedi PK (1998). Regression Analysis of Count Data. Cambridge University
Press, Cambridge.

Davidson R, MacKinnon JG (2004). Econometric Theory and Methods. Oxford University

Press, Oxford.

Franses PH (1998). Time Series Models for Business and Economic Forecasting. Cambridge
University Press, Cambridge.

Franses PH, van Dijk D, Opschoor A (2014). Time Series Models for
Business and Economic Forecasting. 2nd edition. Cambridge Univer-
sity Press, Cambridge. URL http://www.cambridge.org/us/academic/
subjects/economics/econometrics-statistics-and-mathematical-economics/
time-series-models-business-and-economic-forecasting-2nd-edition.

Greene WH (2003). Econometric Analysis. 5th edition. Prentice Hall, Upper Saddle River,
NJ. URL http://pages.stern.nyu.edu/~wgreene/Text/econometricanalysis.htm.

Juselius K (2006). The Cointegrated VAR Model. Oxford University Press, Oxford.
6 AER: Package Vignette and Errata

Kleiber C, Zeileis A (2008). Applied Econometrics with R. Springer-Verlag, New York. ISBN
978-0-387-77316-2.

Kleiber C, Zeileis A (2019). AER: Applied Econometrics with R. R package version 1.2-7,
URL https://CRAN.R-project.org/package=AER.

R Core Team (2019). R: A Language and Environment for Statistical Computing. R Founda-
tion for Statistical Computing, Vienna, Austria. URL https://www.R-project.org/.

Stock JH, Watson MW (2007). Introduction to Econometrics. 2nd edition. Addison-Wesley,

Reading, MA.

Verbeek M (2004). A Guide to Modern Econometrics. 2nd edition. John Wiley & Sons,
Hoboken, NJ.

Winkelmann R, Boes S (2009). Analysis of Microdata. 2nd edition. Springer-Verlag, Berlin

and Heidelberg.

Affiliation:
Christian Kleiber
Faculty of Business and Economics
Universität Basel
Peter Merian-Weg 6
4002 Basel, Switzerland
E-mail: [email protected]
URL: https://wwz.unibas.ch/en/kleiber/

Achim Zeileis
Department of Statistics
Faculty of Economics and Statistics
Universität Innsbruck
Universitätsstr. 15
6020 Innsbruck, Austria
E-mail: [email protected]
URL: https://eeecon.uibk.ac.at/~zeileis/