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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.

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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

Zvi Griliches . 1961. “A Note of Serial Correlation Bias in Estimates of Distributed Lags.” Econometrica 29: 6573.

Grayham Mizon . 1995. “A Simple Message for Autocorrelation Correctors—Don't.” Journal of Econometrics 69: 267288.

P. C. B. Phillips 1977. “Approximations to Some Finite Sample Distributions Associated with a First-Order Stochatic Difference Equation.” Econometrica 45: 463486.

J. White 1961. “Asymptotic Expansions for the Mean and Variance of the Serial Correlation Coefficient.” Biometrika 48: 8594.

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Political Analysis
  • ISSN: 1047-1987
  • EISSN: 1476-4989
  • URL: /core/journals/political-analysis
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