Predetermined variables are variables that were determined prior to the current period. In
econometric
Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8� ...
models this implies that the current period error term is uncorrelated with current and lagged values of the predetermined variable but may be correlated with future values. This is a weaker restriction than strict
exogeneity, which requires the variable to be uncorrelated with past, present, and future shocks.
A common example of a predetermined variable is consumption in models with credit constraints and
rational expectations
In economics, "rational expectations" are model-consistent expectations, in that agents inside the model are assumed to "know the model" and on average take the model's predictions as valid. Rational expectations ensure internal consistency in ...
. Here, consumption is predetermined but not strictly exogenous. An unpredictable negative income shock will be uncorrelated with past (and potentially current) consumption, but will surely be correlated with future consumption—the individual will be forced to adjust their future consumption to accommodate their poorer state, inducing correlation. If the shock affects current consumption, predeterminedness (defined now as lags only) provides potential
instruments
Instrument may refer to:
Science and technology
* Flight instruments, the devices used to measure the speed, altitude, and pertinent flight angles of various kinds of aircraft
* Laboratory equipment, the measuring tools used in a scientific l ...
--lagged values of the variable.
Predeterminedness, or sequential exogeneity, is commonly invoked in dynamic panel models.
Predetermined variables can be shown as: E(u
is, x
it) =0 where s > t.
The presence of predetermined variables is a motivating factor in the
Arellano–Bond estimator
In econometrics, the Arellano–Bond estimator is a generalized method of moments estimator used to estimate dynamic models of panel data. It was proposed in 1991 by Manuel Arellano and Stephen Bond, based on the earlier work by Alok Bhargava a ...
.
References
Econometric models
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