A Note on the Practice of Lagging Variables to Avoid Simultaneity

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: 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.

Keywords: Simultaneity; Endogeneity; Lagged variables (search for similar items in EconPapers)
JEL-codes: C1 C15 C5 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2013-10-16
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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