- Task Choose A Dependent Variable Think About Independent Variables Dummy Also Argue Independent Variables Hypothes 1 (83.59 KiB) Viewed 21 times
•Scholarly literature
•Similar equations
•Practical aspects
2. Specify the model: select the independent variables and the
functional form
•Independent variables and how they should be measured
•The functional (mathematical) form of the variables
•The type of stochastic error term
•A mistake in any of three elements results in a
Specification error
•A Dummy variables takes on the values
of one or zero depending on whether a specified condition holds
3. Hypothesize the expected signs of the coefficients
•Example:
𝑄𝑑=𝑓(−𝑃,+𝑌,−𝑃𝑐,+𝑃𝑠)
where 𝑄𝑑 is demanded quantity;
P – commodity‘s price;
𝑃𝑐 - price of a complementary good;
𝑃𝑠 – price of a substitute good;
𝑌 – consumer income.
4. Collect the data. Inspect and clean the data
•Sample size: the more observations the better
•The same number of observations for each variable
•The same frequency and time period
•Degrees of freedom
•Units of measurement of the variables
•An outlier is an observation that
lies outside the range of the rest of the observations (usually
because of data entry error)
5. Estimate and evaluate the equation
OLS
6. Document the results
•Explanation of the model
•The assumptions
•Procedures and data used
P.S. Do not choose GDP as depended variable
TASK • Choose a dependent variable • Think about independent variables (dummy also) Argue independent variables Hypothesize the expected signs of the coefficients Argue these signs • How are you going to collect the data? .