ECONOMETRICS I

CHAPTER 9 DUMMY VARIABLE REGRESSION

MODELS

Textbook: Damodar N. Gujarati (2004) Basic Econometrics, 4th edition, The McGraw-Hill Companies

• The types of variables that we have encountered in the preceding chapters were essentially ratio scale.

• In this chapter, we consider models that may involve nominal scale variables. Such variables are also known as indicator variables, categorical variables, qualitative variables, or dummy variables.

9.1 THE NATURE OF DUMMY VARIABLES

9.1 THE NATURE OF DUMMY VARIABLES

9.2 ANOVA MODELS

9.2 ANOVA MODELS

9.2 ANOVA MODELS

9.2 ANOVA MODELS

9.2 ANOVA MODELS

9.2 ANOVA MODELS

9.2 ANOVA MODELS

Caution in the Use of Dummy Variables

1. If a qualitative variable has m categories, introduce only (m−1) dummy variables. If you do not follow this rule, you will fall into what is called the dummy variable trap, that is, the situation of perfect collinearity or perfect multicollinearity.

2. The category for which no dummy variable is assigned is known as the base, benchmark, control, comparison, reference, or omitted category. And all comparisons are made in relation to the benchmark category.

3. The intercept value (β1) represents the mean value of the benchmark category. In Example 9.1, the benchmark category is the Western region. Hence, in the regression (9.2.5) the intercept value of about 26,159 represents the mean salary of teachers in the Western states.

Caution in the Use of Dummy Variables

Caution in the Use of Dummy Variables

Caution in the Use of Dummy Variables

Caution in the Use of Dummy Variables

9.3 ANOVA MODELS WITH TWO QUALITATIVE VARIABLES

9.3 ANOVA MODELS WITH TWO QUALITATIVE VARIABLES

9.3 ANOVA MODELS WITH TWO QUALITATIVE VARIABLES

9.4 REGRESSION WITH A MIXTURE OF QUANTITATIVE AND QUALITATIVE REGRESSORS: THE ANCOVA MODELS

9.4 REGRESSION WITH A MIXTURE OF QUANTITATIVE AND QUALITATIVE REGRESSORS: THE ANCOVA MODELS

9.4 REGRESSION WITH A MIXTURE OF QUANTITATIVE AND QUALITATIVE REGRESSORS: THE ANCOVA MODELS

9.4 REGRESSION WITH A MIXTURE OF QUANTITATIVE AND QUALITATIVE REGRESSORS: THE ANCOVA MODELS

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.5 THE DUMMY VARIABLE ALTERNATIVE TO THE CHOW TEST

9.6 INTERACTION EFFECTS USING DUMMY VARIABLES

9.6 INTERACTION EFFECTS USING DUMMY VARIABLES

9.6 INTERACTION EFFECTS USING DUMMY VARIABLES

9.6 INTERACTION EFFECTS USING DUMMY VARIABLES

9.6 INTERACTION EFFECTS USING DUMMY VARIABLES

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.7 THE USE OF DUMMY VARIABLES IN SEASONAL ANALYSIS

9.8 PIECEWISE LINEAR REGRESSION

9.8 PIECEWISE LINEAR REGRESSION

9.8 PIECEWISE LINEAR REGRESSION

9.8 PIECEWISE LINEAR REGRESSION

FIGURE 9.6 Parameters of the piecewise linear regression.

EXAMPLE 9.7 TOTAL COST IN RELATION TO OUTPUT

EXAMPLE 9.7 TOTAL COST IN RELATION TO OUTPUT

9.10 SOME TECHNICAL ASPECTS OF THE DUMMY VARIABLE TECHNIQUE

The Interpretation of Dummy Variables in Semilogarithmic Regressions

EXAMPLE 9.8 LOGARITHM OF HOURLY WAGES IN RELATION TO GENDER