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A Note on the Practice of Lagging Variables to Avoid Simultaneity

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A common practice in applied econometrics consists of replacing a suspected endogenous variable with its lagged values. This note demonstrates that lagging an endogen¬ous variable does not enable one to escape simultaneity bias. The associated estimates are still inconsistent, and hypothesis testing is invalid. I show that the only time a strategy of replacing Xt with Xt-1 enables consistent estimation of structural parameters is when there is no simultaneity to begin with. The implication of this study is that researchers who employ this practice should be explicit about why lagging is an effective estimation strategy.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1332.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 13/32.

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Length: 14 pages
Date of creation: 16 Oct 2013
Handle: RePEc:cbt:econwp:13/32
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  1. Hayo, Bernd & Kutan, Ali M. & Neuenkirch, Matthias, 2010. "The impact of U.S. central bank communication on European and pacific equity markets," Economics Letters, Elsevier, vol. 108(2), pages 172-174, August.
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  7. Michael A. Clemens & Steven Radelet & Rikhil R. Bhavnani & Samuel Bazzi, 2012. "Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth," Economic Journal, Royal Economic Society, vol. 122(561), pages 590-617, June.
  8. Bania, Neil & Gray, Jo Anna & Stone, Joe A., 2007. "Growth, Taxes, and Government Expenditures: Growth Hills for U.S. States," National Tax Journal, National Tax Association, vol. 60(2), pages 193-204, June.
  9. Cornett, Marcia Millon & Marcus, Alan J. & Saunders, Anthony & Tehranian, Hassan, 2007. "The impact of institutional ownership on corporate operating performance," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1771-1794, June.
  10. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  11. Richard K. Green & Stephen Malpezzi & Stephen K. Mayo, 2005. "Metropolitan-Specific Estimates of the Price Elasticity of Supply of Housing, and Their Sources," American Economic Review, American Economic Association, vol. 95(2), pages 334-339, May.
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