Abstract
In his textbook, Hans Schneeweiß (1971) warned that taking first differences in econometric models involving data with a common trend does not offer a solution to the multicollinearity problem. In the following we will confirm his point of view by giving an alternative proof that the generalized method of least squares (GLS), applied to the model with first differences, will not produce other estimates than the ordinary least squares (OLS) method in the original model. Moreover, we shall demonstrate that related estimation procedures also cannot be expected to provide a substantial improvement over the OLS-method. For this analysis the tools from the theory of oblique and orthogonal projectors will turn out to be extremely helpful.
Support by Deutsch Forschungsgemeinschaft Grant Tr 253/2-3 is gratefully acknowledge
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© 1998 Physica-Verlag Heidelberg
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Toutenburg, H., Trenkler, G. (1998). Using First Differences as a Device against Multicollinearity. In: Galata, R., Küchenhoff, H. (eds) Econometrics in Theory and Practice. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-47027-1_12
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DOI: https://doi.org/10.1007/978-3-642-47027-1_12
Publisher Name: Physica-Verlag HD
Print ISBN: 978-3-642-47029-5
Online ISBN: 978-3-642-47027-1
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