The dummy-variable method is a useful device for introducing, into a regression analysis, information contained in qualitative or categorical variables, that is, in variables that are not conventionally measured on a numerical scale, such as race, sex, marital status, occupation, or level of education. It is a means for considering a specific scheme of parameter variation, in which the variability of the coefficients is linked to the causal effect of some precisely identified qualitative variable. But when the qualitative effects are generic, as in the cross-section time-series model, an interpretation in terms of random effects may seem more appealing.
KeywordsCovariance model Cross-section time-series model Dummy variables Engel curve Error component model Qualitative variables Random coefficient model
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