What is a dummy variable, and when do you use it?
What will be an ideal response?
A dummy variable is created by turning a nominal variable into one or more twocategory variables. To do this, what we need to do is make one category into our
reference category, to which the others are going to be compared. Lets take state schools as our reference category in this example. We are first going to compare children in Catholic schools with children in state schools, and then children in local authority
schools with children in state schools. How do we do this? We will have to make two new variables, one for Catholic and one for local authority schools. We will have to recode our variable school type so that all Catholic schools are coded as 1, and all other schools
as 0.
We have to use dummy variables when we have nominal predictors in regression models.
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