Testing Linear Restrictions of Parameters in Regression Analysis

Abstract

In regression we often face situations where we test some restrictions on the regression coefficients, e.g., (i) whether a particular coefficient is equal to a specific value, (ii) whether a coefficient is equal to the other coefficient or (iii) whether a specific linear combination of the coefficients is always constant, and so on. With a little modification of the regression equations and introducing dummy variable we can test cross equation restrictions also. In fact, we combine the two equations into one equation by using dummy variable and then test the restrictions as if it is a single equation model. The role of dummy variables is profound in many of the regressions especially for testing cross equation restrictions.