Regressions: Why Are Economists Obessessed with Them?

• Author: Rodney Ramcharan
• Position: Economist in the IMF's Research Department

Reading is an important skill, and elementary school teachers have observed that the reading ability of their students tends to increase with their shoe size. To help boost reading skills, should policymakers offer prizes to scientists to devise methods to increase the shoe size of elementary school children? Obviously, the tendency for shoe size and reading ability to increase together does not mean that big feet cause improvements in reading skills. Older children have bigger feet, but they also have more developed brains. This natural development of children explains the simple observation that shoe size and reading ability have a tendency to increase together-that is, they are positively correlated. But clearly there is no relationship: bigger shoe size does not cause better reading ability.

In economics, correlations are common. But identifying whether the correlation between two or more variables represents a causal relationship is rarely so easy. Countries that trade more with the rest of the world also have higher income levels-but does this mean that trade raises income levels? People with more education tend to have higher earnings, but does this imply that education results in higher earnings? Knowing precise answers to these questions is important. If additional years of schooling caused higher earnings, then policymakers could reduce poverty by providing more funding for education. If an extra year of education resulted in a $20,000 a year increase in earnings, then the benefits of spending on education would be a lot larger than if an extra year of education caused only a $2 a year increase.

To help answer these types of questions, economists use a statistical tool known as regression analysis. Regressions are used to quantify the relationship between one variable and the other variables that are thought to explain it; regressions can also identify how close and well determined the relationship is. These days, running thousands of regressions has become commonplace and easy-although that was not always the case (see box)-and, in fact, it is difficult to find an empirical economic study without a regression in it. Other fields, including sociology, statistics, and psychology, rely heavily on regressions as well.

The magic of computers

Initial conceptualizations of regression date back to the 19th century, but it was really...