In: Economics
In terms of econometric perspective, what are the assumptions or elements that you need to consider in developing the model for estimation.
Traditional econometric methodology proceeds along the following lines:
Assumption 1 requires that the dependent variable
is a linear combination of the explanatory variables
and the error terms
Assumption 2 requires that explanatory variables x are not
allowed to contain any information on the error terms
, i.e. it must not be possible to explain
through X.
Assumption 3 requires error terms to be independent and identically distributed with expected value to be zero and variance to be constant
Assumption 4 is often listed as a Gauss-Markov assumption and
refers to normally distributed error terms
in population.