The Role of Coefficient Drivers of Time‐Varying Coefficients in Estimating the Total Effects of a Regressor on the Dependent Variable of an Equation

J. Risk Financial Manag. 2022, 15, 331. https://doi.org/10.3390/jrfm15080331

16 Pages Posted: 1 Aug 2022

See all articles by P.A.V.B. Swamy

P.A.V.B. Swamy

Federal Reserve Board

I-Lok Chang

American University - Department of Mathematics & Statistics

Peter von zur Muehlen

Federal Reserve Board

Amit achameesing

Stellenbosch University - Business School (USB)

Date Written: July 27, 2022

Abstract

Typically, the explanatory variables included in a regression model, in conjunction with the omitted relevant regressors implied by the usual error term, have both direct and indirect effects on the dependent variable. Attempts to obtain their separate estimates have been plagued with simultaneity issues. To circumvent these problems, this paper defines their sum as “total effects”, develops a time‐varying coefficients methodology for their estimation without simultaneity bias, and applies these techniques to estimate the total effects of commercial bank credit per‐capita on real GDP per‐capita in Mauritius. An innovation is the introduction of extraneous variables that act as “coefficient drivers” chosen on the basis of best predictive performance, as measured by the smallest value of Theil’s U‐statistic we were able to locate in the estimation.

Keywords: total effects; bank credit; economic growth; direct effects; indirect effects; threshold regression; real GDP; coefficient drivers; Theil’s U statistic

Suggested Citation

Swamy, P.A.V.B. and Chang, I-Lok and von zur Muehlen, Peter and achameesing, Amit, The Role of Coefficient Drivers of Time‐Varying Coefficients in Estimating the Total Effects of a Regressor on the Dependent Variable of an Equation (July 27, 2022). J. Risk Financial Manag. 2022, 15, 331. https://doi.org/10.3390/jrfm15080331, Available at SSRN: https://ssrn.com/abstract=4175621

P.A.V.B. Swamy

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

I-Lok Chang

American University - Department of Mathematics & Statistics ( email )

Washington, DC
United States

Peter Von zur Muehlen (Contact Author)

Federal Reserve Board ( email )

10435 Hunter View Road
Vienna, VA VA 22181
United States
5713281783 (Phone)

Amit Achameesing

Stellenbosch University - Business School (USB)

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