Endogeneity, Time-Varying Coefficients, and Incorrect vs. Correct Ways of Specifying the Error Terms of Econometric Models
P.A.V.B. Swamy (),
Jatinder S. Mehta () and
I-Lok Chang ()
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P.A.V.B. Swamy: Federal Reserve Board (Retired), Washington, DC 20551, USA
Jatinder S. Mehta: Department of Mathematics (Retired), Temple University, Philadelphia, PA 19122, USA
I-Lok Chang: Department of Mathematics (Retired), American University, Washington, DC 20016, USA
Econometrics, 2017, vol. 5, issue 1, 1-17
Using the net effect of all relevant regressors omitted from a model to form its error term is incorrect because the coefficients and error term of such a model are non-unique. Non-unique coefficients cannot possess consistent estimators. Uniqueness can be achieved if; instead; one uses certain “sufficient sets” of (relevant) regressors omitted from each model to represent the error term. In this case; the unique coefficient on any non-constant regressor takes the form of the sum of a bias-free component and omitted-regressor biases. Measurement-error bias can also be incorporated into this sum. We show that if our procedures are followed; accurate estimation of bias-free components is possible.
Keywords: endogenous variable; exogenous variable; time-varying coefficient; unique coefficient and error term; accurate estimation of bias-free component (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
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