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In terms of econometric perspective, what are the assumptions or elements that you need to consider...

In terms of econometric perspective, what are the assumptions or elements that you need to consider in developing the model for estimation.

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Expert Solution

Traditional econometric methodology proceeds along the following lines:

  • Statement of theory or hypothesis.
  • Specification of the mathematical model of the theory
  • Specification of the statistical, or econometric, model
  • Obtaining the data
  • Estimation of the parameters of the econometric model
  • Hypothesis testing
  • Forecasting or prediction
  • Using the model for control or policy purposes

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.

Rahul Sunny answered 2 years ago
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