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Econometrics

Econometrics. Chapter 11 Structural Shifts (Dummy Variables). Models with Structural Shifts - Chapter 11. Intercepts can vary within data Slopes can vary within data Slopes and Intercepts can vary within data Dummy Variables : Variables that take only two values, 1 or 0

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Econometrics

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  1. Econometrics Chapter 11 Structural Shifts (Dummy Variables)

  2. Models with Structural Shifts - Chapter 11 • Intercepts can vary within data • Slopes can vary within data • Slopes and Intercepts can vary within data • Dummy Variables: Variables that take only two values, 1 or 0 • Gender = 1 if Male and 0 otherwise • Malei + Femalei = 1

  3. Structural Shifts – continuedDummy Variables • Intercepts Can Vary • Inflationt = β0 + β1Unemploymentt + β2Shiftt + εt • If Shift = 0, Intercept is β0 • If Shift ≠ 0, Intercept is (β0 + β2) • Slopes Can Vary • Use Interaction Terms • Inflationt = β0 + β1Unemploymentt + β2Unemploymentt x Shiftt + εt

  4. Structural Shifts – continuedDummy Variables With Panel Data – Fixed Effect Models • Fixed Effect Models (Panel Data) • Non-Comparable Comparisons between Observations • Two states with different ways of dealing with spending • Pooled data may not show relationship between Xi and Yi

  5. Structural Shifts – continuedDummy Variables With Panel Data – Fixed Effect Models • Solution: Include dummies for all states in regression • Yik = β0 + βikXik + εik • Where Xik is a Vector of Explanatory Variables, the ith observation of the jth State

  6. Structural Shifts (Dummy Variables) – continuedFixed Effects Models • Fixed Effects: a group of Dummy Variables that correspond to each Cross-Section unit in a Panel Data Set – they measure the effects of all factors that vary across Cross-Section units but Do Not change over time • Time Effects: Group of Dummy Variables that correspond to each time period in a Panel Data Set

  7. Structural Shifts (Dummy Variables) – continuedSummary – Chapter 11 • Economic relationships may shift over time – not all observations are described by the same curve • Dummy Variables can divide the sample into different groups and allow the intercept to vary for each group • Use interaction terms with Dummy Variables to allow slope of curves to differ for each group

  8. Structural Shifts (Dummy Variables) – continuedSummary – Chapter 11 • A fully interacted equation has all variables with interaction terms – it produces parameter estimates that are the same as if each group was estimated separately • The Chow Test can determine whether the curve has shifted • Fixed Effects and Time Effects Models can allow differing intercepts for Cross-Section Units and Time Periods in Panel Data

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