Econometric Analysis PDF
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International Edition The editorial team at Pearson has worked closely with Greene educators around the globe to inform students of the ever-changing world in a broad variety of disciplines. Pearson Education offers this product to the international market, which may or may not include E alterations from the United States version. c o n o m e t r i c A n a l This is a special edition of an established title y widely used by colleges and universities s throughout the world. Pearson published this i s exclusive edition for the benefit of students International Edition outside the United States and Canada. If you purchased this book within the United States Econometric or Canada you should be aware that it has been imported without the approval of the Seventh Edition Publisher or the Author. Pearson International Edition Analysis I n t e r n Seventh Edition a t io n a l E d William H. Greene it io n Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 SEVENTH EDITION ECONOMETRIC ANALYSIS Q INTERNATIONAL EDITION William H. Greene NewYorkUniversity Greene-2140242 A01˙GREE3568˙07˙GE˙FM February16,2011 15:22 ForMargaretandRichardGreene EditorialDirector:SallyYagan SeniorManufacturingBuyer:CarolMelville EditorinChief:DonnaBattista CreativeDirector:ChristyMahon AcquisitionsEditor:AdrienneD’Ambrosio CoverDesigner:JodiNotowitz SeniorInternationalAcquisitionsEditor: CoverImage:RobertAdrianHillman/Alamy LauraDent PermissionsProjectSupervisor:MichaelJoyce EditorialProjectManager:JillKolongowski MediaProducer:MelissaHonig DirectorofMarketing:PatriceJones AssociateProductionProjectManager: SeniorMarketingManager:LoriDeShazo AlisonEusden InternationalMarketingManager:DeanErasmus Full-ServiceProjectManagement: ManagingEditor:NancyFenton MPSLimited,aMacmillanCompany ProductionProjectManager:CarlaThompson CoverPrinter:Lehigh-Phoenix ManufacturingDirector:EvelynBeaton Color/Hagerstown PearsonEducationLimited EdinburghGate,Harlow EssexCM202JE,England andAssociatedCompaniesthroughouttheworld VisitusontheWorldWideWebat:www.pearsoned.co.uk ©PearsonEducationLimited2012 TherightofWilliamH.Greenetobeidentifiedasauthorofthisworkhasbeenassertedbyhimin accordancewiththeCopyright,DesignsandPatentsAct1988. 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ISBN13:978-0-273-75356-8 ISBN10:0-273-75356-8 BritishLibraryCataloguing-in-PublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary 10 9 8 7 6 5 4 3 2 1 15 14 13 12 11 Typesetin10/12TimesbyMPSLimited,aMacmillanCompany. PrintedandboundbyCourier/WestfordinTheUnitedStatesofAmerica Thepublisher’spolicyistousepapermanufacturedfromsustainableforests. Greene-2140242 A01˙GREE3568˙07˙GE˙FM February8,2011 21:6 PEARSONSERIESINECONOMICS Abel/Bernanke/Croushore Hartwick/Olewiler O’Sullivan/Sheffrin/Perez Macroeconomics* TheEconomicsofNatural Economics:Principles,Applicationsand Bade/Parkin ResourceUse Tools* FoundationsofEconomics* Heilbroner/Milberg Parkin Berck/Helfand TheMakingoftheEconomicSociety Economics* TheEconomicsoftheEnvironment Heyne/Boettke/Prychitko Perloff Bierman/Fernandez TheEconomicWayofThinking Microeconomics* GameTheorywithEconomic Hoffman/Averett Microeconomics:Theoryand Applications WomenandtheEconomy: ApplicationswithCalculus* Blanchard Family,Work,andPay Perman/Common/McGilvray/Ma Macroeconomics* Holt NaturalResourcesand Blau/Ferber/Winkler Markets,GamesandStrategic EnvironmentalEconomics TheEconomicsofWomen, Behavior Phelps MenandWork Hubbard/O’Brien HealthEconomics Boardman/Greenberg/Vining/ Economics* Pindyck/Rubinfeld Weimer Money,Banking,andtheFinancial Microeconomics* Cost-BenefitAnalysis System* Riddell/Shackelford/Stamos/ Boyer Hughes/Cain Schneider PrinciplesofTransportationEconomics AmericanEconomicHistory Economics:AToolforCritically Branson Husted/Melvin UnderstandingSociety MacroeconomicTheoryandPolicy InternationalEconomics Ritter/Silber/Udell Brock/Adams Jehle/Reny PrinciplesofMoney,Banking& TheStructureofAmericanIndustry AdvancedMicroeconomicTheory FinancialMarkets* BPEurcuobcnlieocmFiynanceandtheAmerican JAohHnesaolnth-LEacnosnomicsPrimer RTPhrooebteeCcrhttisooince:AFableofFreeTradeand Carlton/Perloff Keat/Young ModernIndustrialOrganization ManagerialEconomics Rohlf IntroductiontoEconomicReasoning Case/Fair/Oster Klein PrinciplesofEconomics* MathematicalMethodsforEconomics Ruffin/Gregory PrinciplesofEconomics Caves/Frankel/Jones Krugman/Obstfeld/Melitz WorldTradeandPayments: InternationalEconomics: Sargent AnIntroduction Theory&Policy* RationalExpectationsandInflation Chapman Laidler Sawyer/Sprinkle EnvironmentalEconomics: TheDemandforMoney InternationalEconomics Theory,Application,andPolicy Leeds/vonAllmen Scherer Cooter/Ulen TheEconomicsofSports IndustryStructure,Strategy,andPublic Law&Economics Leeds/vonAllmen/Schiming Policy Downs Economics* Schiller AnEconomicTheoryofDemocracy Lipsey/Ragan/Storer TheEconomicsofPovertyand Discrimination Ehrenberg/Smith Economics* ModernLaborEconomics Lynn Sherman Ekelund/Ressler/Tollison EconomicDevelopment:Theoryand MarketRegulation Economics* PracticeforaDividedWorld Silberberg Farnham Miller PrinciplesofMicroeconomics EconomicsforManagers EconomicsToday* Stock/Watson Folland/Goodman/Stano UnderstandingModern IntroductiontoEconometrics TheEconomicsofHealthandHealth Economics IntroductiontoEconometrics,Brief Care Edition Miller/Benjamin Fort TheEconomicsofMacroIssues Studenmund SportsEconomics UsingEconometrics:APracticalGuide Miller/Benjamin/North Froyen TheEconomicsofPublicIssues Tietenberg/Lewis Macroeconomics EnvironmentalandNaturalResource Mills/Hamilton Fusfeld Economics UrbanEconomics TheAgeoftheEconomist EnvironmentalEconomicsandPolicy Mishkin Gerber TheEconomicsofMoney,Banking,and Todaro/Smith InternationalEconomics* FinancialMarkets* EconomicDevelopment Gordon TheEconomicsofMoney,Banking,and Waldman Macroeconomics* FinancialMarkets,BusinessSchool Microeconomics Greene Edition* Waldman/Jensen EconometricAnalysis Macroeconomics:PolicyandPractice* IndustrialOrganization:Theoryand Gregory Practice EssentialsofEconomics Murray Econometrics:AModernIntroduction Weil Gregory/Stuart EconomicGrowth RussianandSovietEconomic Nafziger PerformanceandStructure TheEconomicsofDeveloping Williamson Countries Macroeconomics *denotes titles Logontowww.myeconlab.comtolearnmore Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 BRIEQF CONTENTS ExamplesandApplications 25 Preface 33 PartI TheLinearRegressionModel Chapter1 Econometrics 41 Chapter2 TheLinearRegressionModel 51 Chapter3 LeastSquares 66 Chapter4 TheLeastSquaresEstimator 91 Chapter5 HypothesisTestsandModelSelection 148 Chapter6 FunctionalFormandStructuralChange 189 Chapter7 Nonlinear,Semiparametric,andNonparametric RegressionModels 221 Chapter8 EndogeneityandInstrumentalVariableEstimation 259 PartII GeneralizedRegressionModelandEquationSystems Chapter9 TheGeneralizedRegressionModelandHeteroscedasticity 297 Chapter10 SystemsofEquations 330 Chapter11 ModelsforPanelData 383 PartIII EstimationMethodology Chapter12 EstimationFrameworksinEconometrics 472 Chapter13 MinimumDistanceEstimationandtheGeneralized MethodofMoments 495 Chapter14 MaximumLikelihoodEstimation 549 Chapter15 Simulation-BasedEstimationandInferenceandRandom ParameterModels 643 Chapter16 BayesianEstimationandInference 695 PartIV CrossSections,PanelData,andMicroeconometrics Chapter17 DiscreteChoice 721 Chapter18 DiscreteChoicesandEventCounts 800 Chapter19 LimitedDependentVariables—Truncation,Censoring, andSampleSelection 873 4 Greene-2140242 A01˙GREE3568˙07˙GE˙FM June1,2011 15:23 Brief Contents 5 PartV TimeSeriesandMacroeconometrics Chapter20 SerialCorrelation 943 Chapter21 NonstationaryData 982 PartVI Appendices AppendixA MatrixAlgebra 1013 AppendixB ProbabilityandDistributionTheory 1055 AppendixC EstimationandInference 1087 AppendixD Large-SampleDistributionTheory 1106 AppendixE ComputationandOptimization 1129 AppendixF DataSetsUsedinApplications 1149 References 1155 CombinedAuthorandSubjectIndex 1211 Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 CQONTENTS ExamplesandApplications 25 Preface 33 PARTI TheLinearRegressionModel CHAPTER1 Econometrics 41 1.1 Introduction 41 1.2 TheParadigmofEconometrics 41 1.3 ThePracticeofEconometrics 43 1.4 EconometricModeling 44 1.5 PlanoftheBook 47 1.6 Preliminaries 49 1.6.1 NumericalExamples 49 1.6.2 SoftwareandReplication 49 1.6.3 NotationalConventions 49 CHAPTER2 TheLinearRegressionModel 51 2.1 Introduction 51 2.2 TheLinearRegressionModel 52 2.3 AssumptionsoftheLinearRegressionModel 55 2.3.1 LinearityoftheRegressionModel 55 2.3.2 FullRank 59 2.3.3 Regression 60 2.3.4 SphericalDisturbances 61 2.3.5 DataGeneratingProcessfortheRegressors 63 2.3.6 Normality 63 2.3.7 Independence 64 2.4 SummaryandConclusions 65 CHAPTER3 LeastSquares 66 3.1 Introduction 66 3.2 LeastSquaresRegression 66 3.2.1 TheLeastSquaresCoefficientVector 67 6 Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 Contents 7 3.2.2 Application:AnInvestmentEquation 68 3.2.3 AlgebraicAspectsoftheLeastSquaresSolution 70 3.2.4 Projection 71 3.3 PartitionedRegressionandPartialRegression 72 3.4 PartialRegressionandPartialCorrelationCoefficients 76 3.5 GoodnessofFitandtheAnalysisofVariance 79 3.5.1 TheAdjustedR-SquaredandaMeasureofFit 82 3.5.2 R-SquaredandtheConstantTermintheModel 84 3.5.3 ComparingModels 85 3.6 LinearlyTransformedRegression 86 3.7 SummaryandConclusions 87 CHAPTER4 TheLeastSquaresEstimator 91 4.1 Introduction 91 4.2 MotivatingLeastSquares 92 4.2.1 ThePopulationOrthogonalityConditions 92 4.2.2 MinimumMeanSquaredErrorPredictor 93 4.2.3 MinimumVarianceLinearUnbiasedEstimation 94 4.3 FiniteSamplePropertiesofLeastSquares 94 4.3.1 UnbiasedEstimation 95 4.3.2 BiasCausedbyOmissionofRelevantVariables 96 4.3.3 InclusionofIrrelevantVariables 98 4.3.4 TheVarianceoftheLeastSquaresEstimator 98 4.3.5 TheGauss–MarkovTheorem 100 4.3.6 TheImplicationsofStochasticRegressors 100 4.3.7 EstimatingtheVarianceoftheLeastSquaresEstimator 101 4.3.8 TheNormalityAssumption 103 4.4 LargeSamplePropertiesoftheLeastSquaresEstimator 103 4.4.1 ConsistencyoftheLeastSquaresEstimatorofβ 103 4.4.2 AsymptoticNormalityoftheLeastSquaresEstimator 105 4.4.3 Consistencyofs2andtheEstimatorofAsy.Var[b] 107 4.4.4 AsymptoticDistributionofaFunctionofb:TheDelta Method 108 4.4.5 AsymptoticEfficiency 109 4.4.6 MaximumLikelihoodEstimation 113 4.5 IntervalEstimation 115 4.5.1 FormingaConfidenceIntervalforaCoefficient 116 4.5.2 ConfidenceIntervalsBasedonLargeSamples 118 4.5.3 ConfidenceIntervalforaLinearCombinationofCoefficients: TheOaxacaDecomposition 119 4.6 PredictionandForecasting 120 4.6.1 PredictionIntervals 121 4.6.2 PredictingyWhentheRegressionModelDescribesLogy 121 Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 8 Contents 4.6.3 PredictionIntervalforyWhentheRegressionModelDescribes Logy 123 4.6.4 Forecasting 127 4.7 DataProblems 128 4.7.1 Multicollinearity 129 4.7.2 PretestEstimation 131 4.7.3 PrincipalComponents 132 4.7.4 MissingValuesandDataImputation 134 4.7.5 MeasurementError 137 4.7.6 OutliersandInfluentialObservations 139 4.8 SummaryandConclusions 142 CHAPTER5 HypothesisTestsandModelSelection 148 5.1 Introduction 148 5.2 HypothesisTestingMethodology 148 5.2.1 RestrictionsandHypotheses 149 5.2.2 NestedModels 150 5.2.3 TestingProcedures—Neyman–PearsonMethodology 151 5.2.4 Size,Power,andConsistencyofaTest 151 5.2.5 AMethodologicalDilemma:BayesianversusClassicalTesting 152 5.3 TwoApproachestoTestingHypotheses 152 5.4 WaldTestsBasedontheDistanceMeasure 155 5.4.1 TestingaHypothesisaboutaCoefficient 155 5.4.2 TheFStatisticandtheLeastSquaresDiscrepancy 157 5.5 TestingRestrictionsUsingtheFitoftheRegression 161 5.5.1 TheRestrictedLeastSquaresEstimator 161 5.5.2 TheLossofFitfromRestrictedLeastSquares 162 5.5.3 TestingtheSignificanceoftheRegression 166 5.5.4 SolvingOuttheRestrictionsandaCautionabout UsingR2 166 5.6 NonnormalDisturbancesandLarge-SampleTests 167 5.7 TestingNonlinearRestrictions 171 5.8 ChoosingbetweenNonnestedModels 174 5.8.1 TestingNonnestedHypotheses 174 5.8.2 AnEncompassingModel 175 5.8.3 ComprehensiveApproach—TheJTest 176 5.9 ASpecificationTest 177 5.10 ModelBuilding—AGeneraltoSimpleStrategy 178 5.10.1 ModelSelectionCriteria 179 5.10.2 ModelSelection 180 5.10.3 ClassicalModelSelection 180 5.10.4 BayesianModelAveraging 181 5.11 SummaryandConclusions 183 Greene-2140242 A01˙GREE3568˙07˙GE˙FM January19,2011 20:15 Contents 9 CHAPTER6 FunctionalFormandStructuralChange 189 6.1 Introduction 189 6.2 UsingBinaryVariables 189 6.2.1 BinaryVariablesinRegression 189 6.2.2 SeveralCategories 192 6.2.3 SeveralGroupings 192 6.2.4 ThresholdEffectsandCategoricalVariables 194 6.2.5 TreatmentEffectsandDifferencesinDifferences Regression 195 6.3 NonlinearityintheVariables 198 6.3.1 PiecewiseLinearRegression 198 6.3.2 FunctionalForms 200 6.3.3 InteractionEffects 201 6.3.4 IdentifyingNonlinearity 202 6.3.5 IntrinsicallyLinearModels 205 6.4 ModelingandTestingforaStructuralBreak 208 6.4.1 DifferentParameterVectors 208 6.4.2 InsufficientObservations 209 6.4.3 ChangeinaSubsetofCoefficients 210 6.4.4 TestsofStructuralBreakwithUnequalVariances 211 6.4.5 PredictiveTestofModelStability 214 6.5 SummaryandConclusions 215 CHAPTER7 Nonlinear,Semiparametric,andNonparametric RegressionModels 221 7.1 Introduction 221 7.2 NonlinearRegressionModels 222 7.2.1 AssumptionsoftheNonlinearRegressionModel 222 7.2.2 TheNonlinearLeastSquaresEstimator 224 7.2.3 LargeSamplePropertiesoftheNonlinearLeastSquares Estimator 226 7.2.4 HypothesisTestingandParametricRestrictions 229 7.2.5 Applications 231 7.2.6 ComputingtheNonlinearLeastSquaresEstimator 240 7.3 MedianandQuantileRegression 242 7.3.1 LeastAbsoluteDeviationsEstimation 243 7.3.2 QuantileRegressionModels 247 7.4 PartiallyLinearRegression 250 7.5 NonparametricRegression 252 7.6 SummaryandConclusions 255 CHAPTER8 EndogeneityandInstrumentalVariableEstimation 259 8.1 Introduction 259 8.2 AssumptionsoftheExtendedModel 263
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