EconPapers    
Economics at your fingertips  
 

Background Indicators

Burkhard Raunig

Econometrics, 2019, vol. 7, issue 2, 1-14

Abstract: It is customary to assume that an indicator of a latent variable is driven by the latent variable and some random noise. In contrast, a background indicator is also systematically influenced by variables outside the structural model of interest. Background indicators deserve attention because in empirical work they are difficult to distinguish from ordinary effect indicators. This paper assesses instrumental variable (IV) estimation of the effect of a latent variable in a linear model when a background indicator replaces the latent variable. It turns out that IV estimates are inconsistent in many important cases. In some cases, the estimates capture causal effects of the indicator rather than causal effects of the latent variable. A simulation experiment that considers the impact of economic uncertainty on aggregate consumption illustrates some of the results.

Keywords: causal graph; latent variable; indicator variable; instrumental variable; financial development; stock market volatility (search for similar items in EconPapers)
JEL-codes: B23 C C00 C01 C1 C2 C3 C4 C5 C8 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://www.mdpi.com/2225-1146/7/2/20/pdf (application/pdf)
https://www.mdpi.com/2225-1146/7/2/20/ (text/html)

Related works:
Working Paper: Background Indicators (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jecnmx:v:7:y:2019:i:2:p:20-:d:231113

Access Statistics for this article

Econometrics is currently edited by Prof. Dr. Kerry Patterson

More articles in Econometrics from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

 
Page updated 2020-05-12
Handle: RePEc:gam:jecnmx:v:7:y:2019:i:2:p:20-:d:231113