Universidad Carlos III de Madrid

Econometrics I
ME-MIEM
Multiple Linear Regression: Inference II
Problem Set 5

1. Explain carefully why to test joint hypotheses simultaneously by F -statistic test does not necessarily produce
the same conclusions as testing them sequentially ("one at a time") using t-statistic test. Take as example the
hypothesis test of joint signi…cance.

2. Consider the following multiple regression model with k explanatory variables. Write formally the null and
alternative hypotheses in the following cases:

(a) k = 4; test that all the coe¢ cients except the intercept are equal to zero.
(b) k = 3; test that the coe¢ cient of X1 is the unit, and that the coe¢ cients of the other explanatory variables
are zero.
(c) k = 10; test that the coe¢ cient of X1 is the unit, and that the coe¢ cients of X2 and X3 are equal but
with opposite sign.
(d) k = 4; test that the coe¢ cients of the slopes sum one.

Then write the corresponding restricted models for each case.

3. Consider the regression model

Yi = 0 + 1 X1i + 2 X2i + 3 X3i + Ui ; i = 1; :::; 25;

where all assumptions of the classic regression model discussed in class are satis…ed and we also know that the
errors Ui are completely independent of (Xi1 ; Xi2 ; Xi3 ). Explain how would you test the following hypothesis:

(a) H0 : 1 = 2 and 3 = 1 against H1 : 1 6= 2 or 3 6= 1:

(b) H0 : 1= 2 = 2 and 0 = 0 against H1 : 1= 2 6= 2 or 0 6= 0:
(c) H0 : 1 = 2 = 3 = 1 against H1 : 1 = 2 = 3 = c; c 6= 1:
(d) H0 : 1 + 2 = 3 against H1 : 1 + 2 < 3:

4. Prove, under the homoskedasticity assumption, the equivalence of the following two formulas for the F -statistic.
On one hand,
(SSRrestricted SSRunrestricted )/ q
F =
SSRunrestricted / n
where SSRrestricted is the sum of the squared residuals of the restricted regression and SSRunrestricted is the sum
of the squared residuals of the unrestricted regression, q is the number of restrictions under the null hypothesis.
On the other hand, the statistic in terms of the R2 of the two regressions
2 2
Runrestricted Rrestricted q
F = 2 :
(1 Runrestricted )/ n

5. We estimate a Cobb-Douglas production function using a regression model. The OLS estimation of the model
is the following
d
ln Q = 1:37 + 0:632 ln K + 0:452 ln L;
(0:257) (0:219)

where Q is output, K is the capital stock and L are work hours. Denote by ^ K and ^ L the OLS estimates of the
coe¢ cients of ln K and ln L; respectively. The standard errors are in parenthesis. We have also the estimated
K L
d ^ ;^
covariance between ^ and ^ ; robust to the presence of heteroskedasticity, Cov = 0:055: The sample K L
size is 40, and the standard errors of coe¢ cient estimates are robust to the presence of heteroskedasticity.

1
 (a) Test that the elasticities of work and capital are equal.
(b) Test that there are constant returns to scale. Which type of alternative hypothesis you should use?
(c) Test the hypotheses in (a) and (b) simultaneously with the given information.

6. On the Web site of Stock and Watson (2012) you will …nd a data …le Growth that contains data on average
growth rates over 1960-1995 for 65 countries, along with variables that are potentially related to growth. A
detailed description is given in Growth_Description, also available on the Web site. In this exercise you
will investigate the relationship between growth and trade.

(a) Construct a scatter plot of average annual growth rate (Growth) on the average trade share (T radeShare).
Does there appear to be a relationship between the variables?
(b) One country, Malta, has a trade share much larger than the other countries. Find Malta on the scatter
plot. Does Malta look like an outlier? Run a regression of Growth on T radeShare including all the
observations but excluding the data from Malta. In each case, estimate the intercept and the slope and
predict the growth rate for a country with trade share of 0.5 and 1. Construct a 95% con…dence interval
for the coe¢ cient of T radeShare: Is it statistically signi…cant at 5%?
(c) Run a regression of Growth on T radeShare, Y earsSchool; Rev_Coups, Assassinations and RGDP 60
excluding the data from Malta. Construct a 95% con…dence interval for the coe¢ cient of T radeShare: Is
it statistically signi…cant at 5%?
(d) Check if as a group the variables Y earsSchool; Rev_Coups, Assassinations and RGDP 60 can be omitted
from the regression. What is the p-value of the F -statistic?

SOLUTIONS

5. .

(a) t = 2:8425:
(b) t = 0:17748:
(c) F = 5:90:

6. .

(a) Yes.
d (0:5) = 1:793 4; growth
(b) With Malta: growth d (1) = 2:946 6:
d d (1) = 2:638 3:
Without Malta: growth (0:5) = 1: 797 9; growth
(c) ( 0:387 92; 3:069 5) :
(d) F (robust) = 8:18403, p value = 2:64896e 05: