An economist estimates the following regression model:
y = β0 + β1x1 + β2x2 + ε
The estimates of the parameters β1 and β2 are not very large compared with their respective standard errors. But the size of the coefficient of determination indicates quite a strong relationship between the dependent variable and the pair of independent variables. Having obtained these results, the economist strongly suspects the presence of multicollinearity. Since his chief interest is in the influence of X1 on the dependent variable, he decides that he will avoid the problem of multicollinearity by regressing Y on X1 alone. Comment on this strategy.

  • CreatedJuly 07, 2015
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