Overview
This week we will cover non-linear models, which we anticipated last week with an interaction effect between two continuous variables: \(X_1 \times X_2\), where the marginal effect of \(X_1 \rightarrow Y\) is dependent on the value of \(X_2\).
We cover two types of nonlinear models. Today, we cover polynomial models, where we include higher-order \(X\) variables to explain a non-linear effect. Next class we will cover logarithmic models, which are more frequently used — as well as a few final tests and transformations for multivariate regression before we turn to panel data (Unit IV) next week.
Today, we will spend the first half of class finishing last class’ practice problems (on dummy variables and interaction effects), then I will cover polynomial models. After we finish next class’ lecture, we will do another set of R practice problems, and you will be given your final graded HW 5 to work on this material.
Readings
- Ch. 7.1 in Bailey, Real Econometrics
Slides
Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. Note while in going through the slides, you can type h to see a special list of viewing options, and type o for an outline view of all the slides.
The lower button will allow you to download a PDF version of the slides. I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!
