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Estimation of Parameters in the Presence of Model Misspecification and Measurement Error

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Author Info

  • Swamy P. A. V. B.

    ()
    (Retired from the U.S. Federal Reserve Board)

  • Tavlas George S

    ()
    (Bank of Greece)

  • Hall Stephen G. F.

    ()
    (University of Leicester)

  • Hondroyiannis George

    ()
    (Bank of Greece and Harokopio University)

Abstract

Misspecifications of econometric models can lead to biased coefficients and incorrect interpretations of error terms, which in turn can lead to incorrectly estimated models and incorrect inference. There are specific techniques such as instrumental variables, which are used in the economics literature to deal with some individual forms of model misspecification, only addressing one problem at a time. The joint and separate solutions to the problems of unknown functional forms, omitted variables and measurement errors, discussed in this paper, prove that instrumental variables do not exist. Therefore, the specific techniques used in the literature are not feasible. This paper proposes a general method for estimating underlying parameters in the presence of a range of model misspecifications. It is argued that this method can consistently estimate the direct effect of an independent variable on a dependent variable with all of its other determinants held constant even in the presence of an unknown functional form, measurement error and omitted variables.

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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 14 (2010)
Issue (Month): 3 (May)
Pages: 1-35

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Handle: RePEc:bpj:sndecm:v:14:y:2010:i:3:n:1

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Cited by:
  1. Ettredge, Michael & Fuerherm, Elizabeth Emeigh & Li, Chan, 2014. "Fee pressure and audit quality," Accounting, Organizations and Society, Elsevier, vol. 39(4), pages 247-263.
  2. Stephen Hall & P. Swamy & George Tavlas, 2012. "Generalized cointegration: a new concept with an application to health expenditure and health outcomes," Empirical Economics, Springer, vol. 42(2), pages 603-618, April.
  3. Stephen G. Hall & P.A.V.B. Swamy & George S. Tavlas, 2012. "Milton Friedman, the demand for money, and the ECB’s monetary policy strategy," Review, Federal Reserve Bank of St. Louis, issue May, pages 153-186.
  4. P. Swamy & Stephen Hall, 2012. "Measurement of causal effects," Economic Change and Restructuring, Springer, vol. 45(1), pages 3-23, February.
  5. Hall, Stephen G. & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Measuring currency pressures: The cases of the Japanese yen, the Chinese yuan, and the UK pound," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 1-20.
  6. Hall, Stephen G. & Hondroyiannis, George & Kenjegaliev, Amangeldi & Swamy, P.A.V.B. & Tavlas, George S., 2013. "Is the relationship between prices and exchange rates homogeneous?," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 411-438.
  7. Stephen Hall & George Hondroyiannis & P. Swamy & George Tavlas, 2010. "The Fisher Effect Puzzle: A Case of Non-Linear Relationship?," Open Economies Review, Springer, vol. 21(1), pages 91-103, February.
  8. Peter Smith, 2010. "Discussion of the Fisher Effect Puzzle: A Case of Non-Linear Relationship," Open Economies Review, Springer, vol. 21(1), pages 105-108, February.

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