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ECONOMETRICS – INTERPRETING REGRESSION COEFFICIENTS

If your regression looks Then it is a … The general way to interpret the model is … The way to interpret the model if it is
like … model 𝑦 = 3 + 2𝑥
𝑦 = 𝛽( + 𝛽) 𝑥 Level-level A 1 unit increase in x will cause a 𝛽) unit change A 1 unit increase in x will cause a 2 unit
in the average value of y, ceteris paribus. increase in the average value of y, ceteris
paribus.
𝑦 = 𝛽( + 𝛽) log (𝑥) Level-log 01
A 1 percent increase in x will cause a )(( unit A 1 percent increase in x will cause a 0.02
unit increase in the average value of y,
change in the average value of y, ceteris paribus.
ceteris paribus.
log (𝑦) = 𝛽( + 𝛽) 𝑥 Log-level A 1 unit increase in x will cause a 𝛽) × 100 A 1 unit increase in x will cause a 200
percent change in the average value of y, ceteris percent increase in the average value of y,
paribus. ceteris paribus.
log (𝑦) = 𝛽( + 𝛽) log (𝑥) Log-log A 1 percent increase in x will cause a 𝛽) percent A 1 percent increase in x will cause a 2
change in the average value of y, ceteris paribus. percent increase in the average value of y,
ceteris paribus.
Note: In economics, log(𝑥 ) = ln(𝑥 ) because logarithms are assumed to be of natural base – i.e. base e.
What about when there is a quadratic term?
If your regression resembles 𝑦 = 𝛽( + 𝛽) 𝑥 + 𝛽6 𝑥 6 then you find the partial effect of 𝑥 by taking the derivative with respect to 𝑥.
89
In other words: 8: = 𝛽) + 2𝛽6 𝑥

Then, you can interpret as follows:

If 𝜷𝟐 > 𝟎 (your parabola is a happy face J) If 𝜷𝟐 < 𝟎 (your parabola is a sad face L)
As x increases, y begins by decreasing, but at a decreasing rate; As x increases, y begins by increasing, but at a decreasing rate;
however, after a critical value of x, y begins to increase at an however, after a critical value of x, y begins to decrease at an
increasing rate, ceteris paribus. increasing rate, ceteris paribus.
Note: In order to calculate the critical value of 𝑥 at which you find your turning point, you can simply use the formula for the axis of symmetry
0
of a parabola: 𝑥 ∗ = − 601
B