IDEAS home Printed from https://ideas.repec.org/a/gam/jecnmx/v5y2017i1p8-d89266.html
   My bibliography  Save this article

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

Author

Listed:
  • 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, vol. 5(1), pages 1-17, February.
    • Handle: RePEc:gam:jecnmx:v:5:y:2017:i:1:p:8-:d:89266
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2225-1146/5/1/8/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2225-1146/5/1/8/
    Download Restriction: no
    ---><---

    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, vol. 4(2), pages 1-21, June.
    2. 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, vol. 4(2), pages 1-23, March.
    3. 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.
    4. Pratt, John W. & Schlaifer, Robert, 1988. "On the interpretation and observation of laws," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 23-52.
    5. Jun Ma & Mark Wohar (ed.), 2014. "Recent Advances in Estimating Nonlinear Models," Springer Books, Springer, edition 127, number 978-1-4614-8060-0, January.
    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

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Carbajal De Nova, Carolina, 2014. "Synthetic data: an endogeneity simulation," MPRA Paper 79158, University Library of Munich, Germany, revised 11 May 2017.
    3. Swamy Paravastu & Peter Muehlen & Jatinder Singh Mehta & I-Lok Chang, 2022. "The State Of Econometrics After John W. Pratt, Robert Schlaifer, Brian Skyrms, And Robert L. Basmann," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 84(2), pages 627-654, November.

    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. 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, vol. 4(2), pages 1-23, March.
    2. 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, vol. 4(2), pages 1-21, June.
    3. Swamy Paravastu & Peter Muehlen & Jatinder Singh Mehta & I-Lok Chang, 2022. "The State Of Econometrics After John W. Pratt, Robert Schlaifer, Brian Skyrms, And Robert L. Basmann," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 84(2), pages 627-654, November.
    4. Stephen G.Hall & George Hondroyiannis & P.A.V.B. Swamy & George S. Tavlas, 2007. "A Portofolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment," Working Papers 61, Bank of Greece.
    5. Jalal D. Akhavein & John H. Leusner & P. A. V. B. Swamy, "undated". "Solving an Empirical Puzzle in the Capital Asset Pricing Model," Finance and Economics Discussion Series 1996-14, Board of Governors of the Federal Reserve System (U.S.), revised 04 Dec 2019.
    6. Swamy, P.A.V.B. & Mehta, Jatinder S. & Chang, I-Lok & Zimmerman, T.S., 2009. "An efficient method of estimating the true value of a population characteristic from its discrepant estimates," Computational Statistics & Data Analysis, Elsevier, vol. 53(6), pages 2378-2389, April.
    7. 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.
    8. Hall, Stephen G. & Hondroyiannis, George & Swamy, P.A.V.B. & Tavlas, George S., 2009. "Assessing the causal relationship between euro-area money and prices in a time-varying environment," Economic Modelling, Elsevier, vol. 26(4), pages 760-766, July.
    9. Hondroyiannis, George & Swamy, P. A. V. B. & Tavlas, George S., 2001. "Modelling the long-run demand for money in the United Kingdom: a random coefficient analysis," Economic Modelling, Elsevier, vol. 18(3), pages 475-501, August.
    10. Christou, Costas & Swamy, P. A. V. B. & Tavlas, George S., 1998. "A general framework for predicting returns from multiple currency investments," Journal of Economic Dynamics and Control, Elsevier, vol. 22(7), pages 977-1000, May.
    11. George S. Tavlas, 2015. "In Old Chicago: Simons, Friedman, and the Development of Monetary‐Policy Rules," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 99-121, February.
    12. Piyu Yue, 1991. "A microeconomic approach to estimating demand: the asymptotically ideal model," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 36-51.
    13. West, Carol Taylor, 2003. "Structural Regional Factors that Determine Absolute and Relative Accuracy of U.S. Regional Labor Market Forecasts," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(Supplemen), pages 1-15.
    14. Alfred A. Haug & Syed Abul Basher, 2019. "Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach," Applied Economics, Taylor & Francis Journals, vol. 51(48), pages 5282-5296, October.
    15. Dar, Atul A. & AmirKhalkhali, Sal, 2002. "Government size, factor accumulation, and economic growth: evidence from OECD countries," Journal of Policy Modeling, Elsevier, vol. 24(7-8), pages 679-692, November.
    16. Mohsen Bahmani-Oskooee & Ilir Miteza & Altin Tanku, 2020. "Exchange rate changes and money demand in Albania: a nonlinear ARDL analysis," Economic Change and Restructuring, Springer, vol. 53(4), pages 619-633, November.
    17. Swamy, P.A.V.B. & Yaghi, Wisam & Mehta, Jatinder S. & Chang, I-Lok, 2007. "Empirical best linear unbiased prediction in misspecified and improved panel data models with an application to gasoline demand," Computational Statistics & Data Analysis, Elsevier, vol. 51(7), pages 3381-3392, April.
    18. Guido Erreygers & Philip Clarke & Qiong Zheng, 2017. "On the measurement of socioeconomic inequality of health between countries," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 15(2), pages 175-193, June.
    19. Robert L. Hetzel, 2013. "The Monetarist-Keynesian Debate and the Phillips Curve: Lessons from the Great Inflation," Economic Quarterly, Federal Reserve Bank of Richmond, issue 2Q, pages 83-116.
    20. Hsiao, Cheng & Sun, Bao-Hong, 1998. "Modeling survey response bias - with an analysis of the demand for an advanced electronic device," Journal of Econometrics, Elsevier, vol. 89(1-2), pages 15-39, November.

    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:5:y:2017:i:1:p:8-:d:89266. 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.