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# Ch8 - Perfect versus Imperfect Multicollinearity The...

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Perfect versus Imperfect Multicollinearity The Consequences of Multicollinearity Remedies of Multicollinearity Chapter 8 Multicollinearity Masao Ogaki Department of Economics, Ohio State University November 17, 2007 Masao Ogaki Department of Economics, Ohio State University Chapter 8 Multicollinearity

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Perfect versus Imperfect Multicollinearity The Consequences of Multicollinearity Remedies of Multicollinearity Perfect versus Imperfect Multicollinearity Perfect Multicollinearity Perfect multicollinearity is a violation of Classical Assumption VI. We consider two demand functions for food Y i = α 0 + α 1 X 1 i + α 2 X 2 i + i (1) Y i = β 0 + β 1 X 1 i + β 2 X 3 i + i (2) where Y i is demand for food, X 1 i is the price of food, X 2 i is wage income,and X 3 i is total income at time i . Do you expect α 1 and β 1 to be positive or negative? How about α 2 and α 2 ? Masao Ogaki Department of Economics, Ohio State University Chapter 8 Multicollinearity
Perfect versus Imperfect Multicollinearity The Consequences of Multicollinearity Remedies of Multicollinearity Imagine that X 1 i = 5 - 2 X 2 i (3) without any error term for the data set by chance. If we try to run regression (1) in Excel, we get an error message "Linst0 function returns error." This is because this example is constructed so that X 1 and X 2 are perfectly linearly related.

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Ch8 - Perfect versus Imperfect Multicollinearity The...

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