Pt2520 Unit 4 Paper

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In the second model our dummy variable membership in the EU was substituted by the dummy variable membership in the economic and monetary union and therefore we want to investigate whether it is advantageous to be a member of the Economic and Monetary Union or not. Now we denote year by t and country by i and use the following estimation for our basic model: lnfdiit = β0 + β1(wages)it + β2(lnpop)it + β3(lnpatent)it + β4(gdp_growth)it + β5(lnelectric)it + β6(openness)it + β7(unemployment)it + β8(emu)it + ui + vit 5.1 Specification test As long as we are using panel data model as in our previous model, we need to check whether to use fixed effects model or random effects model. To do this statistical check we will use Hausman test again. 5.1.1 Hausman Test…show more content…
The table “Hausman Test – Model 2” shows that the test statistic is not significant, and we cannot reject the null hypothesis. One should mention that this is a really marginal decision, because the p-value amounts to 7% and that is why we could not reject the null hypothesis at a significance level of 5% or 1%, but it would be possible to reject the null hypothesis at the 10% level. We decided to work with 5% significance level and therefore we decided to use our random effects

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