On the Practice of Lagging Variables to Avoid Simultaneity

A common practice in applied economics research consists of replacing a suspected simultaneously determined explanatory variable with its lagged value. This note demonstrates that this practice does not enable one to avoid simultaneity bias. The associated estimates are still inconsistent, and hypot...

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Bibliographic Details
Published in:Oxford bulletin of economics and statistics Vol. 77; no. 6; pp. 897 - 905
Main Author: Reed, William Robert
Format: Journal Article
Language:English
Published: Oxford Blackwell Publishing Ltd 01.12.2015
Wiley-Blackwell
Subjects:
Applied economics
Economic research
Economic theory
Economics
Effectiveness studies
Endogenous
Estimating techniques
Estimation
Estimation bias
Hypothesis testing
Internet
Lagged variables
Research methodology
Reverse causality
Simultaneity
Valuation methods
ISSN:0305-9049, 1468-0084
Online Access:Get full text
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Summary:A common practice in applied economics research consists of replacing a suspected simultaneously determined explanatory variable with its lagged value. This note demonstrates that this practice does not enable one to avoid simultaneity bias. The associated estimates are still inconsistent, and hypothesis testing is invalid. An alternative is to use lagged values of the endogenous variable in instrumental variable estimation. However, this is only an effective estimation strategy if the lagged values do not themselves belong in the respective estimating equation, and if they are sufficiently correlated with the simultaneously determined explanatory variable.
Bibliography:ark:/67375/WNG-MBJJ92XW-2
ArticleID:OBES12088
istex:ED0DA7B86AAD0EBE03A19F2A8AAAF0ACC129A6E5
I acknowledge helpful comments from Kuntal Das, Chris Hajzler, Steven Stillman, Jeffrey Wooldridge, James Ziliak, Arthur Grimes and seminar participants at the University of Otago and the 2014 New Zealand Association of Economists conference. I am also grateful for the comments from anonymous reviewers which substantially improved the analysis. Remaining errors are my own.
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ISSN:0305-9049
1468-0084
DOI:10.1111/obes.12088