1. Univariate Linear Regression Model

Ignacio Moral and Juan M. Rodriguez-Poo
December 10, 2003

In this section we concentrate our attention in the univariate linear regression model. In economics, we can find innumerable discussions of relationships between variables in pairs: consumption and real disposable income, labor supply and real wages and many more. However, the main interest in the study of this model is not its real applicability but the fact that the mathematical and the statistical tools developed for the two variable model are foundations of other more complicated models.

An econometric study begins with a theoretical proposition about the relationship between two variables. Then, given a data set, the empirical investigation provides estimates of unknown parameters in the model, and often attempts to measure the validity of the propositions against the behavior of observable data. It is not our aim to include here a detailed discussion on econometric model building, this type of discussion can be found in Intriligator (1978), however, along the sequent subsections we will introduce, using monte carlo simulations, the main results related to estimation and inference in univariate linear regression models. The next chapters of the book develop more elaborate specifications and various problems that arise in the study and application of these techniques.