Topic 3d - Functional Forms of Model

Olalekan Aworinde PhD

Department of Economics
Babcock University
Ilishan-Remo

Aworinde O.B Functional Forms

Introduction

This slide is to demonstrate how to interprete the eect of a

linear regression model with dierent functional forms. The
forms are linear-linear form, linear-log form, log-linear form,
double log, reciprocal form, log-inverse form and the
polynomial form.

Aworinde O.B Functional Forms

Linear-Linear Form

Model 1
Yt = bo + b1 Xt + εt
Intrepretation
A 1 unit change in Xt will lead to a b unit change in the mean
1

of Yt . For example, if the estimated coecient is 0.52 that

means that a 1 unit increase in Xt will generate a 0.52 unit
increase in Yt .

Aworinde O.B Functional Forms

Linear-Log or Semi-Log Form

Model 2
Yt = bo + b1 logXt + εt
Interpretation
A 1 unit change in Xt will lead to a b unit change in the
1
100

mean of Yt . For example, if the estimated coecient is 63.1

that means that a 1 per cent unit increase in Xt will lead to
0.63 unit increase in Yt .

Aworinde O.B Functional Forms

Log-Linear or Semi-Log Form

Model 3
logYt = bo + b1 Xt + εt
Interpretation
A 1 unit change in Xt will lead to a 100b1 per cent change
inthe mean of Yt . For example, if the estimated coecient is
0.45 that means that a unit increase in X will lead to 45 per
cent increase in Yt .

Aworinde O.B Functional Forms

Double Log

Model 4
logYt = bo + b1 logXt + εt
Interpretation
A 1 unit change in Xt will lead to a b per cent change in the
1

mean of Yt . For example, if the estimated coecient is 0.35

that means that a 1 per cent unit increase in Xt will lead to
0.35 per cent increase in Yt .

Aworinde O.B Functional Forms

Reciprocal Form

Model 5
Yt = bo + b1 X1t + εt
Interpretation
A 1 unit change in Xt will lead to a b unit negative change in
1

the mean of Yt . For example, if the estimated coecient is

0.41 that means that a 1 unit increase in Xt will generate a
0.41 unit decrease in Yt .

Aworinde O.B Functional Forms

Log-Inverse Form

Model 6
logYt = bo + b1 X1t + εt
Interpretation
A 1 unit change in Xt will lead to a 100b1 per cent negative
change in the mean of Yt . For example, if the estimated
coefficient is 0.28 that means that a unit increase inXt will lead
to 28 per cent decrease in Yt .

Aworinde O.B Functional Forms

Polynomial Form

Model 7
Yt = bo + b1 Xt + b2 Xt2 + b3 Xt3 + εt
Interpretation
A 1 unit change in Xt , will lead to a b unit change in the
1

mean of Yt
A 1 unit change in Xt , will lead to a b unit negative change in
2
2

the mean of Yt
A 1 unit change in Xt , will lead to a b unit change in the
3
2

mean of Yt
For example, if the estimated model is given as
Yt = 20 + 0.45Xt − 0.14Xt + 0.19Xt + εt .
2 3

This implies that the coecients of model 7 a-priori will be bo ,

b , and b  0 and the coecent of b ≺ 0.
1 3 2

Aworinde O.B Functional Forms

HAPPY READING AND BEST OF LUCK

Aworinde O.B Functional Forms