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By Patrick Kent Watson, Sonja Sabita Teelucksingh

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Sample text

Suppose, for instance, we want to test the hypothesis that the marginal propensity to import is less than 40%. E. βˆ ( ) 2 The null hypothesis is rejected in favour of the alternative if this value is less than the corresponding value read from the Student distribution for 22 degrees of freedom at the chosen significance level. 725. The null hypothesis that the marginal propensity to import is 40% cannot be rejected at the 5% level of significance. TESTING THE SIMULTANEOUS NULLITY OF THE SLOPE COEFFICIENTS It is important to test the nullity of a given coefficient because, as economists, we want to know whether the associated variable intervenes in the explanation of the dependent 34 A Practical Introduction to Econometric Methods: Classical and Modern variable.

SIGNIFICANCE TESTS OF COEFFICIENTS To some extent, when an economist includes a particular variable among the exogenous variable list, he or she is not always certain that this variable can be used to explain the dependent or endogenous variable. In the import function, for instance, it is a matter for empirical verification that either the income variable or the relative price variable truly helps to explain imports. Suppose one of them, income, for example, was wrongly included, then we would expect that β2 = 0.

It is very difficult to answer this question at this stage of our study of econometrics but at least one word of warning is in order: the conclusions about the significance of this or that variable under the conditions of multicollinearity shown here are very tenuous and great caution should be exercised in using any of the results shown. Furthermore, the process through which variables are (arbitrarily) added and dropped from an equation, as was done here, has given rise to charges of data mining.

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