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On the Practice of Lagging Variables To Avoid Simultaneity

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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.

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  • W. Robert Reed, 2014. "On the Practice of Lagging Variables To Avoid Simultaneity," Working Papers in Economics 14/18, University of Canterbury, Department of Economics and Finance.
    • Handle: RePEc:cbt:econwp:14/18
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    More about this item

    Keywords

    Simultaneity; Reverse causality; Lagged variables;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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