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