- Endogeneity (economics)
In an economic model, parameters or variables are said to be endogenous when they are predicted by other variables in the model.
For example, in a simple
supply and demandmodel, when predicting the quantity demanded, the price is endogenous because consumers change their demand in response to the price. In contrast, a change in consumertastes or preferences would be an exogenouschange on the demand curve. In this case, the price variable is said to have total endogeneity once the demand and supply curves are known.
econometricsthe problem of endogeneity occurs when the independent variableis correlated with the error termin a regressionmodel. This implies that the regression coefficient in an OLSregression is biased. There are many methods of overcoming this, including instrumental variableregression and Heckman selection correction.
In time series
The endogeneity problem is particularly relevant in the context of
time seriesanalysis of causalprocesses. It is common for some factors within a causal system to be dependent for their value in period "n" on the values of other factors in the causal system in period "n-1". Suppose that the level of pest infestation is independent of all other factors within a given period, but is influenced by the level of rainfall and fertilizer in the preceding period. In this instance it would be correct to say that infestation is exogenouswithin the period, but endogenousover time.
Virtuous circle and vicious circle
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