The Fallacy of Differencing to Reduce Multicollinearity

Oscar R. Burt

American Journal of Agricultural Economics, 1987, vol. 69, issue 3, 697-700

Abstract: It is shown analytically that differencing time-series data for the purpose of reducing multicollinearity in the data set for the independent variables of a regression equation cannot possibly succeed when its effect on the disturbance term is taken into account. In addition, the intuitive basis used to justify first differencing of multicollinear data is demonstrated to contain a flaw, even when the effects of differencing the disturbance term are ignored.

Date: 1987
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Persistent link: https://EconPapers.repec.org/RePEc:oup:ajagec:v:69:y:1987:i:3:p:697-700.

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