Suppose that you are the Federal Treasurer of Australia and you want to find out whether lockdowns to fight Covid-19 negatively affects employment and hence the economy. Imagine that you have data on the strictness of lockdowns and unemployment statistics for every suburb in Australia. The data shows that strict lockdowns are positively associated with unemployment levels (i.e. the tougher the lockdowns are the higher is the unemployment rate).

What other ways can you establish causality between the lockdowns and unemployment? Give an example for any two of the four empirical tools to Discuss potential limitations/challenges of each method.

Four Methods are:

Randomised trials/ variables;

Instrumental variables;

Difference-in-Differences;

Regression Discountinuity Design (RDD))