Suppose the true regression model is given by (4-8). The result in (4-10) shows that if either

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Suppose the true regression model is given by (4-8). The result in (4-10) shows that if either P1.2 is nonzero or β2 is nonzero, then regression of y on X1 alone produces a biased and inconsistent estimator of β1. Suppose the objective is to forecast y, not to estimate the parameters. Consider regression of y on X1 alone to estimate β1 with b1 (which is biased). Is the forecast of y computed using X1b1 also biased? Assume that E[X2 | X1] is a linear function of X1. Discuss your findings generally. What are the implications for prediction when variables are omitted from a regression?

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Econometric Analysis

ISBN: 978-0131395381

7th edition

Authors: William H. Greene

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