Dummy variable regression models Flashcards
What is a dummy variable?
(i) It is used to indicate the presence or absence of some categorical effect in a regression model
(ii) It can take the value 0 or 1
(iii) It is used to represent a qualitative variable.
What are analysis-of-variance (ANOVA) models?
Regression models that contain only dummy explanatory variables.
When are logs taken?
A variable is a positive dollar/rand amount.
You have variables with large integer values.
You want to estimate elasticities.
Reasons for taking logs?
Easy to interpret coefficients.
It mitigates heteroscedasticity.
Reduces the effect of outliers.
Do time related variables appear in logs?
Variables measured in years (time related) usually appear in original form and do not take logarithmic forms.
If Y and X are logs, what does B2 measure?
measures elasticity: percentage change in Y for a given percentage change in X.
Define: Elasticity
is a measure of a variable’s sensitivity to a change in another variable.
What are quadratic functions used for?
used to capture decreasing or increasing marginal returns.
What happens when coefficient of x is positive and x^2 is negative?
the quadratic has a parabolic shape.
How do we confirm if a relationship is statistically significant?
Both coefficients should be stat significant to confirm quadratic relationship
What are the other names of dummy variables?
binary variables
categorical variables
What are dummy variables used to account for?
changing slopes over time,
changing intercepts over time,
seasonal patterns and to account for
structural breaks in economic relationships
What values can dummy variables takes?
0 and 1
When can we include that dummy variables have an impact?
Can only conclude that dummies have an impact if coefficients are statistically significant.
