Practice of Lagging Variables To Avoid Simultaneity

Feb 3rd, 2012
Studypool Tutor
University of Kent, Canterbury and Medway
Course: finance
Price: $25 USD

Tutor description

A common practice in applied econometrics work consists of replacing a (suspected) simultaneously-determined explanatory variable with its lagged value. This note demonstrates that this practice does not enable one to escape simultaneity bias. I show through both theory and simulations the infeasibility of identifying structural parameters of the DGP when the relationship between X and Y is characterized by simultaneity. Further, I demonstrate that it is straightforward to generate examples where the researcher is likely to conclude that the effect of X on Y is opposite in sign to its true value, and to find that the associated, wrong-signed coefficient is statistically significant a majority of the time.

Review from student

Studypool Student
" Thank you, Thank you, for top quality work, this is your guy!! "
Ask your homework questions. Receive quality answers!

Type your question here (or upload an image)

1827 tutors are online

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors