Some Limits in the Theory of Multicollinearity

Abstract The name “multicollinearity” was first introduced by Ragnar Frisch 2. In his original formulation the economic variables are supposed to be composed of two parts, a systematic or “true” and an “error” component. There are at least two other cases when the same type of indeterminancy of the estimates arises due to different reasons. Considerable attention was given to this problem which arises when some or all the variables in a regression equation are highly inter-correlated and it becomes almost impossible to separate their influences and obtain the corresponding estimates of the regression coefficients. Consider a linear regression model