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Contents

Preface xxix

Part One Introduction and Review

Chapter 1 Economic Questions and Data 1
1.1 Economic Questions We Examine 1
Question #1: Does Reducing Class Size Improve Elementary School Education? 2
Question #2: Is There Racial Discrimination in the Market for Home Loans? 3
Question #3: How Much Do Cigarette Taxes Reduce Smoking? 3
Question #4: By How Much Will U.S. GDP Grow Next Year?   4
Quantitative Questions, Quantitative Answers 5

1.2 Causal Effects and Idealized Experiments 5

Estimation of Causal Effects 6
Forecasting and Causality 7

1.3 Data: Sources and Types 7

Experimental Versus Observational Data 7
Cross-Sectional Data 8
Time Series Data 9
Panel Data 11

Chapter 2 Review of Probability 14

2.1 Random Variables and Probability Distributions 15
Probabilities, the Sample Space, and Random Variables 15
Probability Distribution of a Discrete Random Variable 16
Probability Distribution of a Continuous Random Variable 19

2.2 Expected Values, Mean, and Variance 19

The Expected Value of a Random Variable 19
The Standard Deviation and Variance 21
Mean and Variance of a Linear Function of a Random Variable 22
Other Measures of the Shape of a Distribution 23

2.3 Two Random Variables 26

Joint and Marginal Distributions 26

vii
viii Contents

Conditional Distributions 27
Independence 31
Covariance and Correlation 31
The Mean and Variance of Sums of Random Variables 32

2.4 The Normal, Chi-Squared, Student t, and F Distributions 36

The Normal Distribution 36
The Chi-Squared Distribution 41
The Student t Distribution 41
The F Distribution 42

2.5 Random Sampling and the Distribution of the Sample Average 43

Random Sampling 43
The Sampling Distribution of the Sample Average 44

2.6 Large-Sample Approximations to Sampling Distributions 47

The Law of Large Numbers and Consistency 48
The Central Limit Theorem 50
Appendix 2.1 Derivation of Results in Key Concept 2.3 63

Chapter 3 Review of Statistics 65

3.1 Estimation of the Population Mean 66
Estimators and Their Properties 66
Properties of Y 68
The Importance of Random Sampling 70

3.2 Hypothesis Tests Concerning the Population Mean 71

Null and Alternative Hypotheses 71
The p-Value 72
Calculating the p-Value When sY Is Known 73
The Sample Variance, Sample Standard Deviation, and Standard Error 74
Calculating the p-Value When sY Is Unknown 76
The t-Statistic 76
Hypothesis Testing with a Prespecified Significance Level 77
One-Sided Alternatives 79

3.3 Confidence Intervals for the Population Mean 80

3.4 Comparing Means from Different Populations 82
Hypothesis Tests for the Difference Between Two Means 82
Confidence Intervals for the Difference Between Two Population Means 84
 Contents ix

3.5 Differences-of-Means Estimation of Causal Effects Using

Experimental Data 84
The Causal Effect as a Difference of Conditional Expectations 85
Estimation of the Causal Effect Using Differences of Means 85

3.6 Using the t-Statistic When the Sample Size Is Small 87

The t-Statistic and the Student t Distribution 87
Use of the Student t Distribution in Practice 89

3.7 Scatterplots, the Sample Covariance, and the Sample

Correlation 91
Scatterplots 91
Sample Covariance and Correlation 92
Appendix 3.1 The U.S. Current Population Survey 106
Appendix 3.2 Two Proofs That Y Is the Least Squares Estimator of μY 107
Appendix 3.3 A Proof That the Sample Variance Is Consistent 108

Part Two Fundamentals of Regression Analysis

Chapter 4 Linear Regression with One Regressor 109
4.1 The Linear Regression Model 109
4.2 Estimating the Coefficients of the Linear Regression
Model 114
The Ordinary Least Squares Estimator 116
OLS Estimates of the Relationship Between Test Scores and the Student–
Teacher Ratio 118
Why Use the OLS Estimator? 119

4.3 Measures of Fit 121

The R2 121
The Standard Error of the Regression 122
Application to the Test Score Data 123

4.4 The Least Squares Assumptions 124

Assumption #1: The Conditional Distribution of ui Given Xi Has a Mean of Zero 124
Assumption #2: (Xi, Yi), i = 1,…, n, Are Independently and Identically
Distributed 126
Assumption #3: Large Outliers Are Unlikely 127
Use of the Least Squares Assumptions 128
x Contents

4.5 Sampling Distribution of the OLS Estimators 129

The Sampling Distribution of the OLS Estimators 130

4.6 Conclusion 133

Appendix 4.1 The California Test Score Data Set 141
Appendix 4.2 Derivation of the OLS Estimators 141
Appendix 4.3 Sampling Distribution of the OLS Estimator 142

Chapter 5 Regression with a Single Regressor: Hypothesis Tests and

Confidence Intervals 146
5.1 Testing Hypotheses About One of the Regression
Coefficients 146
Two-Sided Hypotheses Concerning β1 147
One-Sided Hypotheses Concerning β1 150
Testing Hypotheses About the Intercept β0 152

5.2 Confidence Intervals for a Regression Coefficient 153

5.3 Regression When X Is a Binary Variable 155
Interpretation of the Regression Coefficients 155

5.4 Heteroskedasticity and Homoskedasticity 157

What Are Heteroskedasticity and Homoskedasticity? 158
Mathematical Implications of Homoskedasticity 160
What Does This Mean in Practice? 161

5.5 The Theoretical Foundations of Ordinary Least Squares 163

Linear Conditionally Unbiased Estimators and the Gauss–Markov
Theorem 164
Regression Estimators Other Than OLS 165

5.6 Using the t-Statistic in Regression When the Sample Size

Is Small 166
The t-Statistic and the Student t Distribution 166
Use of the Student t Distribution in Practice 167

5.7 Conclusion 168

Appendix 5.1 Formulas for OLS Standard Errors 177
Appendix 5.2 The Gauss–Markov Conditions and a Proof of the
Gauss–Markov Theorem 178
 Contents xi

Chapter 6 Linear Regression with Multiple Regressors 182

6.1 Omitted Variable Bias 182
Definition of Omitted Variable Bias 183
A Formula for Omitted Variable Bias 185
Addressing Omitted Variable Bias by Dividing the Data into
Groups 187

6.2 The Multiple Regression Model 189

The Population Regression Line 189
The Population Multiple Regression Model 190

6.3 The OLS Estimator in Multiple Regression 192

The OLS Estimator 193
Application to Test Scores and the Student–Teacher Ratio 194

6.4 Measures of Fit in Multiple Regression 196

The Standard Error of the Regression (SER) 196
The R2 196
The “Adjusted R2” 197
Application to Test Scores 198

6.5 The Least Squares Assumptions in Multiple

Regression 199
Assumption #1: The Conditional Distribution of ui Given X1i, X2i, c, Xki Has a
Mean of Zero 199
Assumption #2: (X1i, X2i, c, Xki, Yi), i = 1, c, n, Are i.i.d. 199
Assumption #3: Large Outliers Are Unlikely 199
Assumption #4: No Perfect Multicollinearity 200

6.6 The Distribution of the OLS Estimators in Multiple

Regression 201
6.7 Multicollinearity 202
Examples of Perfect Multicollinearity 203
Imperfect Multicollinearity 205

6.8 Conclusion 206

Appendix 6.1 Derivation of Equation (6.1) 214
Appendix 6.2 Distribution of the OLS Estimators When There Are Two
Regressors and Homoskedastic Errors 214
Appendix 6.3 The Frisch–Waugh Theorem 215
xii Contents

Chapter 7 Hypothesis Tests and Confidence Intervals in Multiple

Regression 217
7.1 Hypothesis Tests and Confidence Intervals for a Single Coefficient 217
Standard Errors for the OLS Estimators 217
Hypothesis Tests for a Single Coefficient 218
Confidence Intervals for a Single Coefficient 219
Application to Test Scores and the Student–Teacher Ratio 220

7.2 Tests of Joint Hypotheses 222

Testing Hypotheses on Two or More Coefficients 222
The F-Statistic 224
Application to Test Scores and the Student–Teacher Ratio 226
The Homoskedasticity-Only F-Statistic 227

7.3 Testing Single Restrictions Involving Multiple Coefficients 229

7.4 Confidence Sets for Multiple Coefficients 231
7.5 Model Specification for Multiple Regression 232
Omitted Variable Bias in Multiple Regression 233
The Role of Control Variables in Multiple Regression 234
Model Specification in Theory and in Practice 236
Interpreting the R2 and the Adjusted R2 in Practice 237

7.6 Analysis of the Test Score Data Set 238

7.7 Conclusion 243
Appendix 7.1 The Bonferroni Test of a Joint Hypothesis 251
Appendix 7.2 Conditional Mean Independence 253

Chapter 8 Nonlinear Regression Functions 256

8.1 A General Strategy for Modeling Nonlinear Regression Functions 258
Test Scores and District Income 258
The Effect on Y of a Change in X in Nonlinear Specifications 261
A General Approach to Modeling Nonlinearities Using Multiple Regression 266

8.2 Nonlinear Functions of a Single Independent Variable 266

Polynomials 267
Logarithms 269
Polynomial and Logarithmic Models of Test Scores and District Income 277
 Contents xiii

8.3 Interactions Between Independent Variables 278

Interactions Between Two Binary Variables 279
Interactions Between a Continuous and a Binary Variable 282
Interactions Between Two Continuous Variables 286

8.4 Nonlinear Effects on Test Scores of the Student–Teacher Ratio 293

Discussion of Regression Results 293
Summary of Findings 297

8.5 Conclusion 298

Appendix 8.1 Regression Functions That Are Nonlinear in the
Parameters 309
Appendix 8.2 Slopes and Elasticities for Nonlinear Regression
Functions 313

Chapter 9 Assessing Studies Based on Multiple Regression 315

9.1 Internal and External Validity 315
Threats to Internal Validity 316
Threats to External Validity 317

9.2 Threats to Internal Validity of Multiple Regression Analysis 319

Omitted Variable Bias 319
Misspecification of the Functional Form of the Regression Function 321
Measurement Error and Errors-in-Variables Bias 322
Missing Data and Sample Selection 325
Simultaneous Causality 326
Sources of Inconsistency of OLS Standard Errors 329

9.3 Internal and External Validity When the Regression Is Used for
Forecasting 331
Using Regression Models for Forecasting 331
Assessing the Validity of Regression Models for Forecasting 332

9.4 Example: Test Scores and Class Size 332

External Validity 332
Internal Validity 339
Discussion and Implications 341

9.5 Conclusion 342

Appendix 9.1 The Massachusetts Elementary School Testing Data 349
xiv Contents

Part Three Further Topics in Regression Analysis

Chapter 10 Regression with Panel Data 350
10.1 Panel Data 351
Example: Traffic Deaths and Alcohol Taxes 352

10.2 Panel Data with Two Time Periods: “Before and After”
Comparisons 354
10.3 Fixed Effects Regression 357
The Fixed Effects Regression Model 357
Estimation and Inference 359
Application to Traffic Deaths 361

10.4 Regression with Time Fixed Effects 361

Time Effects Only 362
Both Entity and Time Fixed Effects 363

10.5 The Fixed Effects Regression Assumptions and Standard Errors for
Fixed Effects Regression 365
The Fixed Effects Regression Assumptions 365
Standard Errors for Fixed Effects Regression 367

10.6 Drunk Driving Laws and Traffic Deaths 368

10.7 Conclusion 372
Appendix 10.1 The State Traffic Fatality Data Set 380
Appendix 10.2 Standard Errors for Fixed Effects Regression 380

Chapter 11 Regression with a Binary Dependent Variable 385

11.1 Binary Dependent Variables and the Linear Probability Model 386
Binary Dependent Variables 386
The Linear Probability Model 388

11.2 Probit and Logit Regression 391

Probit Regression 391
Logit Regression 396
Comparing the Linear Probability, Probit, and Logit Models 398

11.3 Estimation and Inference in the Logit and Probit Models 398
Nonlinear Least Squares Estimation 399
 Contents xv

Maximum Likelihood Estimation 400

Measures of Fit 401

11.4 Application to the Boston HMDA Data 402

11.5 Conclusion 409
Appendix 11.1 The Boston HMDA Data Set 418
Appendix 11.2 Maximum Likelihood Estimation 418
Appendix 11.3 Other Limited Dependent Variable Models 421

Chapter 12 Instrumental Variables Regression 424

12.1 The IV Estimator with a Single Regressor and a Single
Instrument 425
The IV Model and Assumptions 425
The Two Stage Least Squares Estimator 426
Why Does IV Regression Work? 427
The Sampling Distribution of the TSLS Estimator 431
Application to the Demand for Cigarettes 433

12.2 The General IV Regression Model 435

TSLS in the General IV Model 437
Instrument Relevance and Exogeneity in the General IV Model 438
The IV Regression Assumptions and Sampling Distribution of the
TSLS Estimator 439
Inference Using the TSLS Estimator 440
Application to the Demand for Cigarettes 441

12.3 Checking Instrument Validity 442

Assumption #1: Instrument Relevance 443
Assumption #2: Instrument Exogeneity 445

12.4 Application to the Demand for Cigarettes 448

12.5 Where Do Valid Instruments Come From? 453
Three Examples 454

12.6 Conclusion 458

Appendix 12.1 The Cigarette Consumption Panel Data Set 467
Appendix 12.2 Derivation of the Formula for the TSLS Estimator in
Equation (12.4) 467
xvi Contents

Appendix 12.3 Large-Sample Distribution of the TSLS Estimator 468

Appendix 12.4 Large-Sample Distribution of the TSLS Estimator When
the Instrument Is Not Valid 469
Appendix 12.5 Instrumental Variables Analysis with Weak
Instruments 471
Appendix 12.6 TSLS with Control Variables 473

Chapter 13 Experiments and Quasi-Experiments 475

13.1 Potential Outcomes, Causal Effects, and Idealized
Experiments 476
Potential Outcomes and the Average Causal Effect 476
Econometric Methods for Analyzing Experimental Data 478

13.2 Threats to Validity of Experiments 479

Threats to Internal Validity 479
Threats to External Validity 483

13.3 Experimental Estimates of the Effect of Class Size

Reductions 484
Experimental Design 485
Analysis of the STAR Data 486
Comparison of the Observational and Experimental Estimates of Class Size
Effects 491

13.4 Quasi-Experiments 493

Examples 494
The Differences-in-Differences Estimator 496
Instrumental Variables Estimators 499
Regression Discontinuity Estimators 500

13.5 Potential Problems with Quasi-Experiments 502

Threats to Internal Validity 502
Threats to External Validity 504

13.6 Experimental and Quasi-Experimental Estimates in Heterogeneous

Populations 504
OLS with Heterogeneous Causal Effects 505
IV Regression with Heterogeneous Causal Effects 506
 Contents xvii

13.7 Conclusion 509

Appendix 13.1 The Project STAR Data Set 518
Appendix 13.2 IV Estimation When the Causal Effect Varies Across
Individuals 518
Appendix 13.3 The Potential Outcomes Framework for Analyzing Data
from Experiments 520

Part Four Regression Analysis of Economic Time Series Data

Chapter 14 Introduction to Time Series Regression and Forecasting 522
14.1 Using Regression Models for Forecasting 523
14.2 Introduction to Time Series Data and Serial Correlation 524
Real GDP in the United States 524
Lags, First Differences, Logarithms, and Growth Rates 525
Autocorrelation 528
Other Examples of Economic Time Series 529

14.3 Autoregressions 531

The First-Order Autoregressive Model 531
The pth-Order Autoregressive Model 534

14.4 Time Series Regression with Additional Predictors and the

Autoregressive Distributed Lag Model 537
Forecasting GDP Growth Using the Term Spread 537
Stationarity 540
Time Series Regression with Multiple Predictors 541
Forecast Uncertainty and Forecast Intervals 544

14.5 Lag Length Selection Using Information Criteria 547

Determining the Order of an Autoregression 547
Lag Length Selection in Time Series Regression with Multiple Predictors 550

14.6 Nonstationarity I: Trends 551

What Is a Trend? 551
Problems Caused by Stochastic Trends 554
Detecting Stochastic Trends: Testing for a Unit AR Root 556
Avoiding the Problems Caused by Stochastic Trends 561
xviii Contents

14.7 Nonstationarity II: Breaks 561

What Is a Break? 562
Testing for Breaks 562
Pseudo Out-of-Sample Forecasting 567
Avoiding the Problems Caused by Breaks 573

14.8 Conclusion 573

Appendix 14.1 Time Series Data Used in Chapter 14 583
Appendix 14.2 Stationarity in the AR(1) Model 584
Appendix 14.3 Lag Operator Notation 585
Appendix 14.4 ARMA Models 586
Appendix 14.5 Consistency of the BIC Lag Length Estimator 587

Chapter 15 Estimation of Dynamic Causal Effects 589

15.1 An Initial Taste of the Orange Juice Data 590
15.2 Dynamic Causal Effects 593
Causal Effects and Time Series Data 593
Two Types of Exogeneity 596

15.3 Estimation of Dynamic Causal Effects with Exogenous

Regressors 597
The Distributed Lag Model Assumptions 598
Autocorrelated ut, Standard Errors, and Inference 599
Dynamic Multipliers and Cumulative Dynamic Multipliers 600

15.4 Heteroskedasticity- and Autocorrelation-Consistent Standard

Errors 601
Distribution of the OLS Estimator with Autocorrelated Errors 602
HAC Standard Errors 604

15.5 Estimation of Dynamic Causal Effects with Strictly Exogenous

Regressors 606
The Distributed Lag Model with AR(1) Errors 607
OLS Estimation of the ADL Model 610
GLS Estimation 611
The Distributed Lag Model with Additional Lags and AR(p) Errors 613

15.6 Orange Juice Prices and Cold Weather 616

 Contents xix

15.7 Is Exogeneity Plausible? Some Examples 624

U.S. Income and Australian Exports 624
Oil Prices and Inflation 625
Monetary Policy and Inflation 626
The Growth Rate of GDP and the Term Spread 626

15.8 Conclusion 627

Appendix 15.1 The Orange Juice Data Set 634
Appendix 15.2 The ADL Model and Generalized Least Squares in Lag
Operator Notation 634

Chapter 16 Additional Topics in Time Series Regression 638

16.1 Vector Autoregressions 638
The VAR Model 639
A VAR Model of the Growth Rate of GDP and the Term Spread 642

16.2 Multiperiod Forecasts 643

Iterated Multiperiod Forecasts 643
Direct Multiperiod Forecasts 645
Which Method Should You Use? 648

16.3 Orders of Integration and the DF-GLS Unit Root Test 649
Other Models of Trends and Orders of Integration 649
The DF-GLS Test for a Unit Root 651
Why Do Unit Root Tests Have Nonnormal Distributions? 654

16.4 Cointegration 656

Cointegration and Error Correction 656
How Can You Tell Whether Two Variables Are Cointegrated? 658
Estimation of Cointegrating Coefficients 659
Extension to Multiple Cointegrated Variables 661
Application to Interest Rates 662

16.5 Volatility Clustering and Autoregressive Conditional

Heteroskedasticity 664
Volatility Clustering 664
Autoregressive Conditional Heteroskedasticity 666
Application to Stock Price Volatility 667

16.6 Conclusion 670

xx Contents

Part Five The Econometric Theory of Regression Analysis

Chapter 17 The Theory of Linear Regression with One Regressor 676
17.1 The Extended Least Squares Assumptions and the OLS Estimator 677
The Extended Least Squares Assumptions 677
The OLS Estimator 679

17.2 Fundamentals of Asymptotic Distribution Theory 679

Convergence in Probability and the Law of Large Numbers 680
The Central Limit Theorem and Convergence in Distribution 682
Slutsky’s Theorem and the Continuous Mapping Theorem 683
Application to the t-Statistic Based on the Sample Mean 684

17.3 Asymptotic Distribution of the OLS Estimator and

t-Statistic 685
Consistency and Asymptotic Normality of the OLS Estimators 685
Consistency of Heteroskedasticity-Robust Standard Errors 685
Asymptotic Normality of the Heteroskedasticity-Robust t-Statistic 687

17.4 Exact Sampling Distributions When the Errors Are Normally

Distributed 687
Distribution of βn1 with Normal Errors 687
Distribution of the Homoskedasticity-Only t-Statistic 689

17.5 Weighted Least Squares 690

WLS with Known Heteroskedasticity 690
WLS with Heteroskedasticity of Known Functional Form 691
Heteroskedasticity-Robust Standard Errors or WLS? 694
Appendix 17.1 The Normal and Related Distributions and Moments of
Continuous Random Variables 700
Appendix 17.2 Two Inequalities 703

Chapter 18 The Theory of Multiple Regression 705

18.1 The Linear Multiple Regression Model and OLS Estimator in Matrix
Form 706
The Multiple Regression Model in Matrix Notation 706
The Extended Least Squares Assumptions 708
The OLS Estimator 709
 Contents xxi

18.2 Asymptotic Distribution of the OLS Estimator and t-Statistic 710

The Multivariate Central Limit Theorem 710
Asymptotic Normality of bn 711
Heteroskedasticity-Robust Standard Errors 712
Confidence Intervals for Predicted Effects 713
Asymptotic Distribution of the t-Statistic 713

18.3 Tests of Joint Hypotheses 713

Joint Hypotheses in Matrix Notation 714
Asymptotic Distribution of the F-Statistic 714
Confidence Sets for Multiple Coefficients 715

18.4 Distribution of Regression Statistics with Normal Errors 716

Matrix Representations of OLS Regression Statistics 716
Distribution of bn with Normal Errors 717
Distribution of s2uN 718
Homoskedasticity-Only Standard Errors 718
Distribution of the t-Statistic 719
Distribution of the F-Statistic 719

18.5 Efficiency of the OLS Estimator with Homoskedastic Errors 720

The Gauss–Markov Conditions for Multiple Regression 720
Linear Conditionally Unbiased Estimators 720
The Gauss–Markov Theorem for Multiple Regression 721

18.6 Generalized Least Squares 722

The GLS Assumptions 723
GLS When Ω Is Known 725
GLS When Ω Contains Unknown Parameters 726
The Zero Conditional Mean Assumption and GLS 726

18.7 Instrumental Variables and Generalized Method of Moments

Estimation 728
The IV Estimator in Matrix Form 729
Asymptotic Distribution of the TSLS Estimator 730
Properties of TSLS When the Errors Are Homoskedastic 731
Generalized Method of Moments Estimation in Linear Models 734
Appendix 18.1 Summary of Matrix Algebra 746
Appendix 18.2 Multivariate Distributions 749
Appendix 18.3 Derivation of the Asymptotic Distribution of βn 751
xxii Contents

Appendix 18.4 Derivations of Exact Distributions of OLS Test Statistics

with Normal Errors 752
Appendix 18.5 Proof of the Gauss–Markov Theorem for Multiple
Regression 753
Appendix 18.6 Proof of Selected Results for IV and GMM Estimation 754

Appendix 757
References 765
Glossary 771
Index 779
Key Concepts

Part One Introduction and Review

1.1 Cross-Sectional, Time Series, and Panel Data 12
2.1 Expected Value and the Mean 20
2.2 Variance and Standard Deviation 21
2.3 Means, Variances, and Covariances of Sums of Random Variables 35
2.4 Computing Probabilities Involving Normal Random Variables 37
2.5 Simple Random Sampling and i.i.d. Random Variables 44
2.6 Convergence in Probability, Consistency, and the Law of Large Numbers 48
2.7 The Central Limit Theorem 52
3.1 Estimators and Estimates 67
3.2 Bias, Consistency, and Efficiency 68
3.3 Efficiency of Y : Y Is BLUE  69
3.4 The Standard Error of Y 75
3.5 The Terminology of Hypothesis Testing 78
3.6 Testing the Hypothesis E(Y) = μY,0 Against the Alternative E(Y) ≠ μY,0 79
3.7 Confidence Intervals for the Population Mean 81

Part Two Fundamentals of Regression Analysis

4.1 Terminology for the Linear Regression Model with a Single Regressor 113
4.2 The OLS Estimator, Predicted Values, and Residuals 117
4.3 The Least Squares Assumptions 129
4.4 Large-Sample Distributions of bn0 and bn1 131
5.1 General Form of the t-Statistic 147
5.2 Testing the Hypothesis b1 = b1,0 Against the Alternative b1 ≠ b1,0 149
5.3 Confidence Interval for β1 154
5.4 Heteroskedasticity and Homoskedasticity 159
5.5 The Gauss–Markov Theorem for bn1 165
6.1 Omitted Variable Bias in Regression with a Single Regressor 185
6.2 The Multiple Regression Model 192
6.3 The OLS Estimators, Predicted Values, and Residuals in the Multiple Regression
Model 194
6.4 The Least Squares Assumptions in the Multiple Regression Model 201
6.5 Large-Sample Distribution of bn0, bn1, c, bnk 202
7.1 Testing the Hypothesis bj = bj,0 Against the Alternative bj ≠ bj,0 219
7.2 Confidence Intervals for a Single Coefficient in Multiple Regression 220

xxiii
xxiv Key Concepts

7.3 Omitted Variable Bias in Multiple Regression 233

7.4 R2 and R 2: What They Tell You—and What They Don’t 238
8.1 The Expected Change on Y of a Change in X1 in the Nonlinear Regression
Model (8.3) 263
8.2 Logarithms in Regression: Three Cases 276
8.3 A Method for Interpreting Coefficients in Regressions with Binary
Variables 281
8.4 Interactions Between Binary and Continuous Variables 284
8.5 Interactions in Multiple Regression 289
9.1 Internal and External Validity 316
9.2 Omitted Variable Bias: Should I Include More Variables in
My Regression? 321
9.3 Functional Form Misspecification 322
9.4 Errors-in-Variables Bias 324
9.5 Sample Selection Bias 326
9.6 Simultaneous Causality Bias 329
9.7 Threats to the Internal Validity of a Multiple Regression Study 330

Part Three Further Topics in Regression Analysis

10.1 Notation for Panel Data 351
10.2 The Fixed Effects Regression Model 359
10.3 The Fixed Effects Regression Assumptions 366
11.1 The Linear Probability Model 389
11.2 The Probit Model, Predicted Probabilities, and Estimated Effects 394
11.3 Logit Regression 396
12.1 The General Instrumental Variables Regression Model and
Terminology 436
12.2 Two Stage Least Squares 438
12.3 The Two Conditions for Valid Instruments 439
12.4 The IV Regression Assumptions 440
12.5 A Rule of Thumb for Checking for Weak Instruments 444
12.6 The Overidentifying Restrictions Test (The J-Statistic) 448

Part four Regression Analysis of Economic Time Series Data

14.1 Lags, First Differences, Logarithms, and Growth Rates 527
14.2 Autocorrelation (Serial Correlation) and Autocovariance 528
14.3 Autoregressions 535
14.4 The Autoregressive Distributed Lag Model 540
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