Author Question: If the absolute value of your calculated t-statistic exceeds the critical value from the standard ... (Read 230 times)

ec501234 · **on:** Jun 29, 2018

If the absolute value of your calculated t-statistic exceeds the critical value from the standard normal distribution, you can

A) reject the null hypothesis.
B) safely assume that your regression results are significant.
C) reject the assumption that the error terms are homoskedastic.
D) conclude that most of the actual values are very close to the regression line.

Question 2

A study attempts to investigate the role of the various determinants of regional Canadian unemployment rates in order to get a better picture of Canadian aggregate unemployment rate behavior.

The annual data (1967-1991) is for five regions (Atlantic region, Quebec, Ontario, Prairies, and British Columbia), and four age-gender groups (female and male, adult and young). Focusing on young females, the authors find significant effects for the following variables: the regional relative minimum wage rate (minimum wages divided by average hourly earnings), the regional share of youth in the labor force, the regional share of adult females in the labor force, United States activity shocks (deviations of United States GDP from trend), an indicator of the degree of monetary tightness in Canada, regional union density, and a regional index of unemployment insurance generosity. Explain why the authors only used region fixed effects. How would their specification have to change if they also employed time fixed effects?
What will be an ideal response?

amcvicar · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Answer: A

Answer to Question 2

Answer: Since the study used Canada-wide effects (United States activity shocks, and monetary tightness), these are identical for all regions at a point in time. Using time fixed effects in addition to these two variables would have generated perfect multicollinearity among the regressors, and hence the OLS estimator would not exist. An alternative specification would include time fixed effects, but eliminate the two variables which are constant across all regions at a given point in time.