Models Containing Unobservable Variables and Traditional Regression Analysis

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NOT

FOR QUOTATION WITHOUT PERMISSION

OF

THE AUTHOR

MODElS CONTAINING UNOBSERVABLE VARIABLES

AND

TRADITIONAL REGRESSION ANALYSIS

V.

Fedorov

March 1984 WP-84-16

Working

P a p e r s a r e interim reports on work of the International Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed herein do not necessarily represent those of t h e Institute or of its National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2381 Laxenburg, Austria

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The objective of the Forest Sector Project a t IIASA is to study long- t e r m development alternatives for t h e forest sector on a global basis.

One of t h e key problems of analysing long-term development is to predict t h e changing patterns of demand, supply capacity and international trade. In the modeling of these structural change processes econometric estimation plays a central role.

In this paper Professor Fedorov draws attention to the fact t h a t some of the results from econometric analysis of estimation i n situa- tions with unobservable variables can be readdressed within the frame- work of traditional regression analysis. These observations are of impor- tance in t h e choice of methods to be used in estimating demand, supply or import equations.

Markku Kallio Project Leader

Forest Sector Project

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I

a m very grateful t o Lucy Tomsits for editing and typing the paper.

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