Skip to main content
×
×
Home

Dynamic Models for Dynamic Theories: The Ins and Outs of Lagged Dependent Variables

  • Luke Keele (a1) and Nathan J. Kelly (a2)
Abstract

A lagged dependent variable in an OLS regression is often used as a means of capturing dynamic effects in political processes and as a method for ridding the model of autocorrelation. But recent work contends that the lagged dependent variable specification is too problematic for use in most situations. More specifically, if residual autocorrelation is present, the lagged dependent variable causes the coefficients for explanatory variables to be biased downward. We use a Monte Carlo analysis to assess empirically how much bias is present when a lagged dependent variable is used under a wide variety of circumstances. In our analysis, we compare the performance of the lagged dependent variable model to several other time series models. We show that while the lagged dependent variable is inappropriate in some circumstances, it remains an appropriate model for the dynamic theories often tested by applied analysts. From the analysis, we develop several practical suggestions on when and how to use lagged dependent variables on the right-hand side of a model.

Copyright
References
Hide All
Achen, Christopher H. 2000. “Why Lagged Dependent Variables Can Supress the Explanatory Power of Other Independent Variables.” Presented at the Annual Meeting of Political Methodology, Los Angeles.
Beck, Nathaniel. 1985. “Estimating Dynamic Models Is Not Merely a Matter of Technique.” Political Methodology 11: 7189.
Beck, Nathaniel. 1992. “Comparing Dynamic Specifications: The Case of Presidential Approval.” Political Analysis 3: 2750.
Davidson, Russell, and MacKinnon, James G. 1993. Estimation and Inference in Econometrics. New York: Oxford University Press.
Greene, William H. 2003. Econometric Analysis, 5th ed. New York: Macmillan.
Griliches, Zvi. 1961. “A Note of Serial Correlation Bias in Estimates of Distributed Lags.” Econometrica 29: 6573.
Hendry, David F. 1995. Dynamic Econometrics. Oxford: Oxford University Press.
Hendry, David, and Mizon, Grayham. 1978. “Serial Correlation as a Convenient Simplification, Not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England.” Economic Journal 88: 549563.
Hibbs, Douglas A. Jr. 1974. “Problems of Statistical Estimation and Causal Inference in Time-Series Regression Models.” In Sociological Methodology 1973–1974, ed. Costner, Herbert L. San Francisco: Jossey-Bass, pp. 252308.
Hurwicz, L. 1950. “Least-Squares Bias in Time Series.” In Statistical Inference in Dynamic Economic Models, ed. Koopmans, T. New York: Wiley, pp. 215249.
Maddala, G. S., and Rao, A. S. 1973. “Tests for Serial Correlation in Regression Models with Lagged Dependent Variables and Serially Correlated Errors.” Econometrica 47: 761774.
Malinvaud, E. 1970. Statistical Methods of Econometrics, 2nd ed. Amsterdam: North-Holland.
Mizon, Grayham. 1995. “A Simple Message for Autocorrelation Correctors—Don't.” Journal of Econometrics 69: 267288.
Phillips, P. C. B. 1977. “Approximations to Some Finite Sample Distributions Associated with a First-Order Stochatic Difference Equation.” Econometrica 45: 463486.
Phillips, P. C. B., and Wickens, M. R. 1978. Exercises in Econometrics, vol. 2. Oxford: Phillip Allan.
White, J. 1961. “Asymptotic Expansions for the Mean and Variance of the Serial Correlation Coefficient.” Biometrika 48: 8594.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Political Analysis
  • ISSN: 1047-1987
  • EISSN: 1476-4989
  • URL: /core/journals/political-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×
MathJax
Type Description Title
PDF
Supplementary materials

Keele and Kelly supplementary material
Appendix

 PDF (109 KB)
109 KB

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed