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Endogeneity, Time-Varying Coefficients, and Incorrect vs. Correct Ways of Specifying the Error Terms of Econometric Models

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  • P.A.V.B. Swamy

    () (Federal Reserve Board (Retired), Washington, DC 20551, USA)

  • Jatinder S. Mehta

    () (Department of Mathematics (Retired), Temple University, Philadelphia, PA 19122, USA)

  • I-Lok Chang

    () (Department of Mathematics (Retired), American University, Washington, DC 20016, USA)

Abstract

Using the net effect of all relevant regressors omitted from a model to form its error term is incorrect because the coefficients and error term of such a model are non-unique. Non-unique coefficients cannot possess consistent estimators. Uniqueness can be achieved if; instead; one uses certain “sufficient sets” of (relevant) regressors omitted from each model to represent the error term. In this case; the unique coefficient on any non-constant regressor takes the form of the sum of a bias-free component and omitted-regressor biases. Measurement-error bias can also be incorporated into this sum. We show that if our procedures are followed; accurate estimation of bias-free components is possible.

Suggested Citation

  • P.A.V.B. Swamy & Jatinder S. Mehta & I-Lok Chang, 2017. "Endogeneity, Time-Varying Coefficients, and Incorrect vs. Correct Ways of Specifying the Error Terms of Econometric Models," Econometrics, MDPI, Open Access Journal, vol. 5(1), pages 1-17, February.
  • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:1:p:8-:d:89266
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    References listed on IDEAS

    as
    1. P.A.V.B. Swamy & I-Lok Chang & Jatinder S. Mehta & William H. Greene & Stephen G. Hall & George S. Tavlas, 2016. "Removing Specification Errors from the Usual Formulation of Binary Choice Models," Econometrics, MDPI, Open Access Journal, vol. 4(2), pages 1-21, June.
    2. repec:gam:jecnmx:v:4:y:2016:i:2:p:19:d:66559 is not listed on IDEAS
    3. Pratt, John W. & Schlaifer, Robert, 1988. "On the interpretation and observation of laws," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 23-52.
    4. P.A.V.B. Swamy & Stephen G. Hall & George S. Tavlas & I-Lok Chang & Heather D. Gibson & William H. Greene & Jatinder S. Mehta, 2016. "A Method for Measuring Treatment Effects on the Treated without Randomization," Econometrics, MDPI, Open Access Journal, vol. 4(2), pages 1-23, March.
    5. Swamy, P.A.V.B. & Mehta, J.S. & Tavlas, G.S. & Hall, S.G., 2015. "Two applications of the random coefficient procedure: Correcting for misspecifications in a small area level model and resolving Simpson's paradox," Economic Modelling, Elsevier, vol. 45(C), pages 93-98.
    6. Friedman, Milton & Schwartz, Anna J, 1991. "Alternative Approaches to Analyzing Economic Data," American Economic Review, American Economic Association, vol. 81(1), pages 39-49, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Carbajal De Nova, Carolina, 2014. "Synthetic data: an endogeneity simulation," MPRA Paper 79158, University Library of Munich, Germany, revised 11 May 2017.
    2. Paniagua, Jordi & Sapena, Juan & Tamarit, Cecilio, 2017. "Fiscal sustainability in EMU countries: A continued fiscal commitment?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 85-97.
    3. Carbajal De Nova, Carolina, 2014. "Synthetic data: an endogeneity simulation," MPRA Paper 79067, University Library of Munich, Germany, revised 10 May 2017.

    More about this item

    Keywords

    endogenous variable; exogenous variable; time-varying coefficient; unique coefficient and error term; accurate estimation of bias-free component;

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C - Mathematical and Quantitative Methods
    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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