# 467 this is the value of an f282 random variable n 88

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4.67; this is the value of an F2,82 random variable (n = 88, k = 3), and the associated p-value is.012. This is evidence of functional form misspecification in (6.23). The RESET statistic in (6.25)is 2.56, with p-value 5 .084. Thus, we do not reject (6.25) at the 5% significance level (althoughwe would at the 10% level). On the basis of RESET, the log-log model in (6.25) is preferred.One was rejected by RESET, while the other was not (at least at the 5% level). Often, thingsare not so simple. A drawback with RESET is that it provides no real direction on how to proceedif the model is rejected. Rejecting (9.4) by using RESET does not immediately suggest that (6.25)is the next step. Equation (9.5) was estimated because constant elasticity models are easy tointerpret and can have nice statistical properties. In this example, it so happens that it passes thefunctional form test as well.Some have argued that RESET is a very general test for model misspecification, includingunobserved omitted variables and heteroskedasticity. Unfortunately, such use of RESET is largelymisguided. It can be shown that RESET has no power for detecting omitted variables wheneverthey have expectations that are linear in the included independent variables in the model [seeWooldridge (1995) for a precise statement]. Further, if the functional form is properly specified,RESET has no power for detecting heteroskedasticity. The bottom line is that RESET is afunctional form test, and nothing more.Example in generating RAMSEY RESET Test through EviewsExample:Let us have an example on the effect of labor and capital inputson gross domestic product
Estimate the equationThe Click View, Stability Diagnostic, and then RAMSEY RESET Test6.7. The Test for Structural Stability of the Model: Chow TestWhen we use a regression model involving time series data, it may happen that there is astructural change in the relationship between the regressand Y and the regressors. By structuralchange, we mean that the values of the parameters of the model do not remain the same throughthe entire time period. Sometime the structural change may be due to external forces (e.g., the oilembargoes imposed by the OPEC oil cartel in 1973 and 1979 or the Gulf War of 19901991), ordue to policy changes (such as the switch from a fixed exchange-rate system to a flexible exchange-rate system around 1973) or action taken by Congress (e.g., the tax changes initiated by PresidentReagan in his two terms in office or changes in the minimum wage rate) or to a variety of othercauses.How do we find out that a structural change has in fact occurred? To be specific, considerthe data given in Table 8.9. This table gives data on disposable personal income and personal
savings, in billions of dollars, for the United States for the period 19701995. Suppose we want toestimate aTable 6.3.

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