IDEAS home Printed from https://ideas.repec.org/a/gam/jecnmx/v7y2019i2p20-d231113.html
   My bibliography  Save this article

Background Indicators

Author

Listed:
  • Burkhard Raunig

    (Central Bank of Austria, Economic Studies Division, Otto-Wagner-Platz 3, 1090 Vienna, Austria
    The views expressed in this study do not necessarily reflect the official viewpoint of the Oesterreichische Nationalbank or of the Eurosystem.)

Abstract

It is customary to assume that an indicator of a latent variable is driven by the latent variable and some random noise. In contrast, a background indicator is also systematically influenced by variables outside the structural model of interest. Background indicators deserve attention because in empirical work they are difficult to distinguish from ordinary effect indicators. This paper assesses instrumental variable (IV) estimation of the effect of a latent variable in a linear model when a background indicator replaces the latent variable. It turns out that IV estimates are inconsistent in many important cases. In some cases, the estimates capture causal effects of the indicator rather than causal effects of the latent variable. A simulation experiment that considers the impact of economic uncertainty on aggregate consumption illustrates some of the results.

Suggested Citation

  • Burkhard Raunig, 2019. "Background Indicators," Econometrics, MDPI, vol. 7(2), pages 1-14, May.
    • Handle: RePEc:gam:jecnmx:v:7:y:2019:i:2:p:20-:d:231113
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2225-1146/7/2/20/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2225-1146/7/2/20/
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christina D. Romer, 1990. "The Great Crash and the Onset of the Great Depression," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(3), pages 597-624.
    2. Alan Carruth & Andy Dickerson & Andrew Henley, 2000. "What do We Know About Investment Under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-154, April.
    3. Guiseppe Bertola & Ricardo J. Caballero, 1994. "Irreversibility and Aggregate Investment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(2), pages 223-246.
    4. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    5. Roger E. A. Farmer, 2015. "The Stock Market Crash Really Did Cause the Great Recession," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(5), pages 617-633, October.
    6. Kinal, Terrence W, 1980. "The Existence of Moments of k-Class Estimators," Econometrica, Econometric Society, vol. 48(1), pages 241-249, January.
    7. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084, Central Bank of Chile.
    8. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    9. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    10. Manabu Kuroki & Judea Pearl, 2014. "Measurement bias and effect restoration in causal inference," Biometrika, Biometrika Trust, vol. 101(2), pages 423-437.
    11. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    12. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    13. Andrew B. Abel & Janice C. Eberly, 1996. "Optimal Investment with Costly Reversibility," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 581-593.
    14. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
    15. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    16. Pearl Judea, 2013. "Linear Models: A Useful “Microscope” for Causal Analysis," Journal of Causal Inference, De Gruyter, vol. 1(1), pages 155-170, June.
    17. Elena Stanghellini & Nanny Wermuth, 2005. "On the identification of path analysis models with one hidden variable," Biometrika, Biometrika Trust, vol. 92(2), pages 337-350, June.
    18. Hoover,Kevin D., 2001. "Causality in Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521002882, October.
    19. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
    20. Mariassunta Giannetti & Steven Ongena, 2009. "Financial Integration and Firm Performance: Evidence from Foreign Bank Entry in Emerging Markets," Review of Finance, European Finance Association, vol. 13(2), pages 181-223.
    21. repec:bla:jecsur:v:14:y:2000:i:2:p:119-53 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:onb:oenbwp:y::i:168:b:1 is not listed on IDEAS
    2. N. Bloom, 2016. "Fluctuations in uncertainty," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 4.
    3. Burkhard Raunig & Johann Scharler & Friedrich Sindermann, 2017. "Do Banks Lend Less in Uncertain Times?," Economica, London School of Economics and Political Science, vol. 84(336), pages 682-711, October.
    4. F. Bacchini & M. E. Bontempi & R. Golinelli & C. Jona Lasinio, 2014. "ICT and Non-ICT investments: short and long run macro dynamics," Working Papers wp956, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    6. Nick Bloom, 2007. "Uncertainty and the Dynamics of R&D," American Economic Review, American Economic Association, vol. 97(2), pages 250-255, May.
    7. Hanno Dihle, 2015. "Real Options in a Ramsey style Growth Model," Discussion Paper Series 32, Department of International Economic Policy, University of Freiburg, revised Dec 2015.
    8. Iván Alfaro & Nicholas Bloom & Xiaoji Lin, 2024. "The Finance Uncertainty Multiplier," Journal of Political Economy, University of Chicago Press, vol. 132(2), pages 577-615.
    9. Chirinko, Robert S. & Schaller, Huntley, 2009. "The irreversibility premium," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 390-408, April.
    10. Harmenberg, Karl & Öberg, Erik, 2021. "Consumption dynamics under time-varying unemployment risk," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 350-365.
    11. Helena Chuliá & Jorge M. Uribe, 2019. "“Expected, Unexpected, Good and Bad Uncertainty"," IREA Working Papers 201919, University of Barcelona, Research Institute of Applied Economics, revised Nov 2019.
    12. Chuliá, Helena & Guillén, Montserrat & Uribe, Jorge M., 2017. "Measuring uncertainty in the stock market," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 18-33.
    13. Abiad, Abdul & Qureshi, Irfan A., 2023. "The macroeconomic effects of oil price uncertainty," Energy Economics, Elsevier, vol. 125(C).
    14. Chen, Cheng & Senga, Tatsuro & Sun, Chang & Zhang, Hongyong, 2023. "Uncertainty, imperfect information, and expectation formation over the firm’s life cycle," Journal of Monetary Economics, Elsevier, vol. 140(C), pages 60-77.
    15. Klaus Mohn & Petter Osmundsen, 2011. "Asymmetry and uncertainty in capital formation: an application to oil investment," Applied Economics, Taylor & Francis Journals, vol. 43(28), pages 4387-4401.
    16. Gabriel P. Mathy, 2020. "How much did uncertainty shocks matter in the Great Depression?," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(2), pages 283-323, May.
    17. Huberts, Nick F.D. & Rossi Silveira, Rafael, 2023. "How economic depreciation shapes the relationship of uncertainty with investments’ size & timing," International Journal of Production Economics, Elsevier, vol. 260(C).
    18. Phan, Dinh Hoang Bach & Tran, Vuong Thao & Nguyen, Dat Thanh, 2019. "Crude oil price uncertainty and corporate investment: New global evidence," Energy Economics, Elsevier, vol. 77(C), pages 54-65.
    19. Scott R Baker & Nicholas Bloom & Stephen J Terry, 2024. "Using Disasters to Estimate the Impact of Uncertainty," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 720-747.
    20. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2014. "Economic policy uncertainty and firm-level investment," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 42-53.
    21. Davis, Graham A. & Cairns, Robert D., 2017. "The odd notion of “reversible investment”," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 172-180.

    More about this item

    Keywords

    causal graph; latent variable; indicator variable; instrumental variable; financial development; stock market volatility;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jecnmx:v:7:y:2019:i:2:p:20-:d:231113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.