Chapter 8
Functional Form, Specification, and Structural Stability
In This Chapter
Understanding how to use and interpret nonlinear regression functions
Transforming common nonlinear functions in economics into linear functions
Testing for specification issues and checking the reliability of your results
You typically choose the dependent variable in a particular analysis based on the economic question or puzzle that you’re interested in exploring and your prior knowledge of economic theory. However, you have to think about several additional questions to determine whether you have a good econometric model. In particular, you need to ask:
What independent variables or factors are likely to affect my outcome or variable of interest (dependent variable)?
Do I expect the variables to have a linear (that is, constant or straight-line) impact on the dependent variable, or are some of them likely to have a nonlinear effect?
Your answers to these questions address what econometricians call ...
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