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QUALITATIVE EXPLANATORY
VARIABLES REGRESSION MODELS
Damodar Gujarati
Econometrics by Example
QUALITATIVE VARIABLES
Qualitative variables are nominal scale variables which have no
particular numerical values.
We can quantify them by creating the so-called dummy
variables, which take values of 0 and 1
0 indicates the absence of an attribute
1 indicates the presence of the attribute
REFERENCE CATEGORY
The category that gets the value of 0 is called
the reference, benchmark, or comparison
category.
All comparisons are made in relation to the
reference category.
Damodar Gujarati
Econometrics by Example
Damodar Gujarati
Econometrics by Example
Damodar Gujarati
Econometrics by Example
FRISCH-WAUGH THEOREM
By introducing the seasonal dummies in the model we
deseasonalize all the time series used in the model
If variables are subject to prior adjustment by
ordinary least squares and the residuals are
subsequently used in a regression equation, then the
resulting estimates are identical to those from a
regression which uses unadjusted data but uses the
adjustment variables explicitly.
Damodar Gujarati
Econometrics by Example