Dear all,
I use Stata13 although this is not a software-related question but on empirical approach.
I want to seek the opinion of experts if it is econometric-ally correct to use a predicted value as an EXPLANATORY VARIABLE in another regression in order to test a hypothesis.
I have a time series data from 1980 to 2015 using the ARDL framework. My hypothesis is that credit growth (an outcome of a financial reform) is a predictor of income inequality and in order to test this, I need to first analyse the impact of interest rate (the reform variable) on credit growth after which I test the impact of credit growth on income inequality - in order to establish a nexus.
Using the Gini index as the measure of income inequality, and domestic credit as proxy for credit growth, I formulate 2 equations:
First equation: credit = intercept + interest rate + per capita income + broad money + u
Second equation: gini = credithat + per capita income + education + age dependency + u
My questions are: is my 2nd equation appropriate, with:
1) credithat as an explanatory variable?
2) the inclusion of "per capita income" as an explanatory variable in the Gini equation having used it in the credit equation?
What questions/criticisms are likely to emanate from reviewers as regards using this approach? Suggestions and comments will be much appreciated.
Thanks!
I use Stata13 although this is not a software-related question but on empirical approach.
I want to seek the opinion of experts if it is econometric-ally correct to use a predicted value as an EXPLANATORY VARIABLE in another regression in order to test a hypothesis.
I have a time series data from 1980 to 2015 using the ARDL framework. My hypothesis is that credit growth (an outcome of a financial reform) is a predictor of income inequality and in order to test this, I need to first analyse the impact of interest rate (the reform variable) on credit growth after which I test the impact of credit growth on income inequality - in order to establish a nexus.
Using the Gini index as the measure of income inequality, and domestic credit as proxy for credit growth, I formulate 2 equations:
First equation: credit = intercept + interest rate + per capita income + broad money + u
Second equation: gini = credithat + per capita income + education + age dependency + u
My questions are: is my 2nd equation appropriate, with:
1) credithat as an explanatory variable?
2) the inclusion of "per capita income" as an explanatory variable in the Gini equation having used it in the credit equation?
What questions/criticisms are likely to emanate from reviewers as regards using this approach? Suggestions and comments will be much appreciated.
Thanks!
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