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A lagged dependent variable, autocorrelated disturbances, and unit root tests - peculiar OLS bias properties - a pedagogical note

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  • Asatoshi Maeshiro

Abstract

The paper provides applied econometricians with a useful insight into the interaction between lagged dependent variables and autocorrelated disturbances. More specifically, the paper explains heuristically why, how and when the bias of the OLS estimator of the coefficient of a lagged dependent variable can be smaller when the disturbances are autocorrelated than when they are NID. It also explains why and how the powers and sizes of some of the unit root tests are distorted by AR(1) and MA(1) disturbances. The results should be of interest to applied econometricians using vector autoregressive or error-correction models as well.

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  • Asatoshi Maeshiro, 1999. "A lagged dependent variable, autocorrelated disturbances, and unit root tests - peculiar OLS bias properties - a pedagogical note," Applied Economics, Taylor & Francis Journals, vol. 31(3), pages 381-396.
    • Handle: RePEc:taf:applec:v:31:y:1999:i:3:p:381-396
    DOI: 10.1080/000368499324363
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    Cited by:

    1. Yihui Lan, 2003. "The Long-Term Behaviour of Exchange Rates, Part IV: Big Macs and the Evolution of Exchange Rates," Economics Discussion / Working Papers 03-08, The University of Western Australia, Department of Economics.
    2. Lawford, Steve & Stamatogiannis, Michalis P., 2009. "The finite-sample effects of VAR dimensions on OLS bias, OLS variance, and minimum MSE estimators," Journal of Econometrics, Elsevier, vol. 148(2), pages 124-130, February.
    3. Toni Stocker, 2007. "On the asymptotic bias of OLS in dynamic regression models with autocorrelated errors," Statistical Papers, Springer, vol. 48(1), pages 81-93, January.
    4. Yihui Lan, 2001. "The Long-Run Value of Currencies: A Big Mac Perspective," Economics Discussion / Working Papers 01-17, The University of Western Australia, Department of Economics.
    5. Yu Hao & Shang Gao & Yunxia Guo & Zhiqiang Gai & Haitao Wu, 2021. "Measuring the nexus between economic development and environmental quality based on environmental Kuznets curve: a comparative study between China and Germany for the period of 2000–2017," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 23(11), pages 16848-16873, November.

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