Re: st: Quadratic Interaction Term.

[Maarten buis <maartenbuis@yahoo.co.uk>]

--- 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

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

http://www.maartenbuis.nl
--------------------------


      

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