Question

10. Explain briefly the steps of an empirical work using regression.

Answer 1

Linear regression can be used to empirically establish the relationship between a variable of interest, say a person’s wage, and a set of other variables that may be correlated with each other, such as gender, education, and experience. Estimating such relationships is routinely done by ordinary least squares, which tries to make the regression model fit the data as well as possible. Linear regression can predict the outcome variable in cases where it is not observed and thus policymakers can use it to generate predictions for the outcome variable after changing one or more of the explanatory variables to reflect a policy intervention.