Advances in Decision Sciences (ADS)

Measurement Error in a First-order Autoregression

Measurement Error in a First-order Autoregression

Title

Measurement Error in a First-order Autoregression

Authors

Abstract

The Ordinary Least Squares (OLS) estimator for the slope parameter in a first-order autoregressive model is biased when the variable is measured with error. Such an error may occur with revisions of macroeconomic data. This paper illustrates and proposes a simple procedure to alleviate the bias, and is based on Total Least Squares (TLS). TLS is, in general, consistent, and also works well in small samples. Simulation experiments and an empirical example show the usefulness of this method.

Keywords

Errors-in-variables, OLS, First-order autoregression, Total Least Squares

Classification-JEL

C20, C51

Pages

1-14

https://doi.org/10.47654/v24y2020i2p1-14

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