### Abstract

Omitted variables that interact with included independent variables change the vertical placement of observations. Thus, by projecting the data to an output oriented VRS DEA frontier, the influence of omitted variables can be eliminated. After this is done once, the efficient observations can be eliminated and the process repeated. Each subsequent iteration shows the relationship between the dependant and known independent variable for progressively less favorable omitted variables. Building on these ideas, we introduce a new analytical technique named "Reiterative Truncated Projected Least Squares" (RTPLS). We provide both a theoretical argument and simulation evidence that RTPLS produces less bias than ordinary least squares (OLS) when there are omitted variables that interact with the included variables. By way of example, we show how omitted variables have affected the relationship between the monetary base (MB) and the money supply (M2 + CDs) for Japan using monthly data from January 1970 to April 2003.

Original language | English (US) |
---|---|

Pages (from-to) | 819-840 |

Number of pages | 22 |

Journal | European Journal of Operational Research |

Volume | 178 |

Issue number | 3 |

DOIs | |

State | Published - May 1 2007 |

### Fingerprint

### Keywords

- Data envelopment analysis
- Monetary policy
- Omitted variables

### ASJC Scopus subject areas

- Computer Science(all)
- Modeling and Simulation
- Management Science and Operations Research
- Information Systems and Management

### Cite this

**Tackling the omitted variables problem without the strong assumptions of proxies.** / Leightner, Jonathan E.; Inoue, Tomoo.

Research output: Contribution to journal › Article

*European Journal of Operational Research*, vol. 178, no. 3, pp. 819-840. https://doi.org/10.1016/j.ejor.2006.02.022

}

TY - JOUR

T1 - Tackling the omitted variables problem without the strong assumptions of proxies

AU - Leightner, Jonathan E.

AU - Inoue, Tomoo

PY - 2007/5/1

Y1 - 2007/5/1

N2 - Omitted variables that interact with included independent variables change the vertical placement of observations. Thus, by projecting the data to an output oriented VRS DEA frontier, the influence of omitted variables can be eliminated. After this is done once, the efficient observations can be eliminated and the process repeated. Each subsequent iteration shows the relationship between the dependant and known independent variable for progressively less favorable omitted variables. Building on these ideas, we introduce a new analytical technique named "Reiterative Truncated Projected Least Squares" (RTPLS). We provide both a theoretical argument and simulation evidence that RTPLS produces less bias than ordinary least squares (OLS) when there are omitted variables that interact with the included variables. By way of example, we show how omitted variables have affected the relationship between the monetary base (MB) and the money supply (M2 + CDs) for Japan using monthly data from January 1970 to April 2003.

AB - Omitted variables that interact with included independent variables change the vertical placement of observations. Thus, by projecting the data to an output oriented VRS DEA frontier, the influence of omitted variables can be eliminated. After this is done once, the efficient observations can be eliminated and the process repeated. Each subsequent iteration shows the relationship between the dependant and known independent variable for progressively less favorable omitted variables. Building on these ideas, we introduce a new analytical technique named "Reiterative Truncated Projected Least Squares" (RTPLS). We provide both a theoretical argument and simulation evidence that RTPLS produces less bias than ordinary least squares (OLS) when there are omitted variables that interact with the included variables. By way of example, we show how omitted variables have affected the relationship between the monetary base (MB) and the money supply (M2 + CDs) for Japan using monthly data from January 1970 to April 2003.

KW - Data envelopment analysis

KW - Monetary policy

KW - Omitted variables

UR - http://www.scopus.com/inward/record.url?scp=33751116113&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=33751116113&partnerID=8YFLogxK

U2 - 10.1016/j.ejor.2006.02.022

DO - 10.1016/j.ejor.2006.02.022

M3 - Article

AN - SCOPUS:33751116113

VL - 178

SP - 819

EP - 840

JO - European Journal of Operational Research

JF - European Journal of Operational Research

SN - 0377-2217

IS - 3

ER -