Journal
OXFORD BULLETIN OF ECONOMICS AND STATISTICS
Volume 77, Issue 6, Pages 897-905Publisher
WILEY
DOI: 10.1111/obes.12088
Keywords
Simultaneity; Reverse causality; Lagged variables
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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.
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