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Misleading Regressions with Constructed Variables

Author

Listed:
  • Dixon, R.
  • Shepherd, D.

Abstract

It is common practice to examine empirical models in which one of the regressors is constructed as the weighted average or sum of a set of series that includes the dependent variable. Examples include models relating money and wealth, consumption and income and regional and national unemployment. In this paper we show that biased results are likely to be generated by such models and that the identified bias is distinct from the more familiar simultaneous equation bias. The theoretical arguments are illustrated with simulation experiments and as a practical example we consider the relationship between regional and national unemployment in Australia.

Suggested Citation

  • Dixon, R. & Shepherd, D., 2000. "Misleading Regressions with Constructed Variables," Department of Economics - Working Papers Series 754, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:754
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    File URL: http://www.economics.unimelb.edu.au/downloads/wpapers-00-01/754.pdf
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    Cited by:

    1. David Shepherd & Robert Dixon, 2002. "The Relationship Between Regional and National Unemployment," Regional Studies, Taylor & Francis Journals, vol. 36(5), pages 469-480.

    More about this item

    Keywords

    REGRESSION ANALYSIS ; ESTIMATOR ; EMPLOYMENT ; REGIONAL DEVELOPMENT;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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