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Multicollinearity in econometrics refers to a situation in a multiple regression model where two or more explanatory variables are highly linearly correlated. In other words, one independent variable can be nearly perfectly predicted from the others. This high correlation among regressors does not violate the assumptions of the classical linear regression model directly, but it creates difficulties in estimating the unique effect of each independent variable on the dependent variable. Multicollinearity is typically measured using indicators like the correlation coefficient between independent variables, the variance inflation factor (VIF), or the condition number of the matrix of regressors. ___ _______ ________ __________ __________ ____.
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