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Say you have an equation:

$$y = b_0 + b_1X_1 +b_2X_2$$

How would you test the hypothesis that $\frac{b1}{b2} = q$?

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migrated from economics.stackexchange.com May 4 '12 at 4:36

This question came from our site for economists and graduate-level economics students.

You could try bootstrapping. –  Charlie Aug 15 '12 at 0:07

1 Answer 1

You can linearize your hypothesis and conduct an $F(r,n-3)$ test, where $r$ is the number of restrictions (in your case it's 1) and $(n-3)$ is the degrees of freedom (which is the number of observations less 3 variables ($x_1$, $x_2$, and constant). You can rewrite your hypothesis as $b_1-b_2q=0$. Then you test that null. For example, in Stata with $q=2$:

reg y x1 x2    
test x1-q*x2

This will give you the $F$-statistic and its $p$-value. You reject the null hypothesis when the p-value is less than the significance level, usually .05 or .01.

Alternatively, you can test the non-linear hypothesis using a Wald test. This has dubious small sample properties and can be sensitive to the way the restrictions are written. In Stata, this will be

reg y x1 x2    
testnl -b[x1]/_b[x2]=2

I would do both, and see if they agree.

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thank you very much –  defel Apr 14 '12 at 0:03

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