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Misleading Regressions with Constructed Variables

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Author Info
Dixon, R.
Shepherd, D.

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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.

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File URL: http://www.economics.unimelb.edu.au/SITE/research/workingpapers/wp00_01/754.pdf
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Publisher Info
Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 754.

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Length: 37 pages
Date of creation: 2000
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Handle: RePEc:mlb:wpaper:754

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Related research
Keywords: REGRESSION ANALYSIS ; ESTIMATOR ; EMPLOYMENT ; REGIONAL DEVELOPMENT;

Find related papers by JEL classification:
C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
R23 - Urban, Rural, and Regional Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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  1. David Shepherd & Robert Dixon, 2002. "The Relationship Between Regional and National Unemployment," Regional Studies, Taylor and Francis Journals, vol. 36(5), pages 469-480, July. [Downloadable!] (restricted)
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This page was last updated on 2009-11-23.

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