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Re: st: Quadratic Interaction Term.

From   Maarten buis <>
Subject   Re: st: Quadratic Interaction Term.
Date   Mon, 13 Sep 2010 08:16:07 +0000 (GMT)

--- On Fri, 10/9/10, natasha agarwal wrote:
> I want to interact FDI*GDP and then introduce the quadratic
> term of GDP with its interaction with FDI. So now the estimating
> equation looks like
> lnVA=lnK+Lnl+lnFDI+lnGDP+lnGDP^2+lnFDI*lnGDP+lnFDI*(lnGDP^2)
> When I estimate this equation, I get the coefficient on
> the lnFDI*(lnGDP^2) is insignificant but when I remove lnGDP^2
> and re-estimate the same lnFDI*(lnGDP^2) becomes significant.
> However, the sign and magnitude does not change. The sign,
> Can anyone please explain me why is this happening?

Now the interaction term is picking up non-linearity that actually
occured in the main effect. In general, if you want to add 
non-linearity in combination with an interaction effect, then I
would make sure that the main effect is at least as flexible as
the interaction effect to avoid this problem.

Hope this helps,

Maarten L. Buis
Institut fuer Soziologie
Universitaet Tuebingen
Wilhelmstrasse 36
72074 Tuebingen


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