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Lecture Slides: Powerpoint PDF
- Articulate what it means to “get the model right”
- Learn transformations that can turn a misspecified model into a well- specified model
- Test for nonlinearities in an econometric model
- Moving off the Farm
What We Learned
An econometric model will almost never be literally right in the sense that it describes precisely how one variable depends on a set of other variables.
A good econometric model is as simple as possible and fits the data well.
- Taking logs of the variables, fitting a polynomial, adding interaction terms, and adding right-hand-side variables are easy ways to improve model specification.