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Economics 105: Statistics

Economics 105: Statistics. RAP oral presentation schedule … We’ll do 8 per lab for each of the next 2 weeks. Lab Tue Apr 24, Thur Apr 26 & Tue May 1, Thur May 3. Violation of Assumptions ( 1 & 5) : well-specified model

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Economics 105: Statistics

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  1. Economics 105: Statistics RAP oral presentation schedule … We’ll do 8 per lab for each of the next 2 weeks. Lab Tue Apr 24, Thur Apr 26 & Tue May 1, Thur May 3

  2. Violation of Assumptions (1 & 5): well-specified model • true model is (A) • but we run (B) • Including an irrelevant variable • is an unbiased estimator of • ; less efficient • estimator of , , is unbiased • t & F tests are valid Specification Bias

  3. Violation of Assumptions (1&5): well-specified model • true model is (C) • but we run (D) • Omitting a relevant variable • is a biased estimator of • is actually smaller; more efficient • estimator of , , is now biased • t & F tests are incorrect Specification Bias

  4. When is an unbiased estimator of ? • b21 is the slope coefficient from a regression of the EXCLUDED variable on the INCLUDED variable Omitted Variable Bias

  5. Omitted Variable Bias Subcript c indexes 64 countries Descriptive statistics

  6. Omitted Variable Bias

  7. Omitted Variable Bias

  8. Omitted Variable Bias

  9. Omitted Variable Bias

  10. Omitted Variable Bias … approximately equal

  11. Multicollinearity “Multicollinearity” typically refers to severe, but imperfect multicollinearity Matter of degree, not existence Consequences Estimates of the coefficients are still unbiased Std errors of these estimates are increased t-statistics are smaller Estimates are sensitive to changes in specification (i.e., which variables are included in the model) R2 largely unaffected

  12. Multicollinearity Detection calculate all the pairwise correlation coefficients > .7 or .8 is some cause for concern Variance Inflation Factors (VIF) can also be calculated Hallmark is high R2 but insignificant t-statistics Remedy Do nothing Drop a variable Transform multicollinear variables need to have same sign and magnitudes Get more data (i.e., increase the sample size)

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