1 MODEL SPECIFICATIONS Dr. Tu Thuy Anh Faculty of International Economics Problems  Model misspecification:  Omitting relevant variables  Including irrelevant variables  Function specification: Ramsey test  Structural change: the Chow test 2 Consequences of Variable Misspecification True Model Fitted Model Y  1   2X2  u Y  1   2X2   3X3  u 3 3 1 2 2 ˆ b X Y b b X    1 2 2 Y ˆ  b  b X To keep the analysis simple, we will assume that there are only two possibilities. Either Y depends only on X2 , or it depends on both X2 and X3 . OMISSION OF A RELEVANT VARIABLE