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Chapter 4

Multiple Regression

The General Model

Economics is complex, and a model with one independent variable is usually not able to explain an economic phenomenon. The extension from simple to multiple regression is easy. The additional exogenous variables are included in the mode linearly. This literally means that independent variables, multiplied by their respective coefficients, are included in additive format in the model.

 Y = β0 + β1 X1 + β2 X2 + … + βK XK + ε (4.1)

The subscript K indicates that there are K-many independent variables. K is an integer, which means it is a whole number without a decimal point because it represents the count of independent variables, which is a countable value. The three dots represent repetition ...

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