On the Practice of Lagging Variables To Avoid Simultaneity

W. Reed ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: A common practice in applied economics research consists of replacing a suspected simultaneously-determined explanatory variable with its lagged value. This note demonstrates that this practice does not enable one to avoid simultaneity bias. The associated estimates are still inconsistent, and hypothesis testing is invalid. One alternative is to use lagged values of the endogenous variable in instrumental variable estimation. However, this is only an effective estimation strategy if the lagged values do not themselves belong in the respective estimating equation, and if they are sufficiently correlated with the simultaneously-determined explanatory variable.

Keywords: Simultaneity; Reverse causality; Lagged variables (search for similar items in EconPapers)
JEL-codes: C1 C15 C5 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2014-07-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://repec.canterbury.ac.nz/cbt/econwp/1418.pdf (application/pdf)

Related works:
Journal Article: On the Practice of Lagging Variables to Avoid Simultaneity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:14/18

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