Solved – How to deal with interaction term’s VIF score

Question

I have a linear regression model that has no multicolinearity problem with low VIF scores.
However, when I include the interaction term, this interaction term and its components get very high VIF scores.
Can I ignore the multicolinearity problem and high VIF scores of the interaction term in this case?

Answer 1

The short answer is yes. Interaction terms tend to be collinear with the original variables involved. That is why post-hoc interaction tests are often underpowered.

Interaction that is unaccounted for renders the estimate wrong, while inflated variance inflates p-value. If the interaction terms are already statistically significant, inflation of variance is no longer a problem.