# st: Why won't my LDV correlate with the model error?

 From "Clive Nicholas" <[email protected]> To [email protected] Subject st: Why won't my LDV correlate with the model error? Date Tue, 26 Oct 2004 03:05:14 +0100 (BST)

```All,

This is such a basic problem, I don't understand why I can't find the
solution, but here goes.

In preparing to muck around with some -ivreg2- test code, I've been
running some basic lagged-DV regressions in order to introduce an
instrument into an IV regression. But there's a problem, as demonstrated
by this simple model fitted to Garrett and Mitchell's (2001) data, which
is freely available on request:

. reg growthpc lgrowth trade lowwage fdi spend left

Source |       SS       df       MS              Number of obs =     542
-----------+------------------------------           F(  6,   535) =   30.72
Model |  799.307961     6  133.217994           Prob > F      =  0.0000
Residual |  2320.23777   535  4.33689303           R-squared     =  0.2562
-----------+------------------------------           Adj R-squared =  0.2479
Total |  3119.54573   541  5.76625828           Root MSE      =  2.0825
----------------------------------------------------------------------------
growthpc |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-----------+----------------------------------------------------------------
lgrowth |   .3161383   .0406073     7.79   0.000      .236369    .3959077
trade |   .0173584   .0046084     3.77   0.000     .0083056    .0264113
lowwage |   .0369588   .0139028     2.66   0.008      .009648    .0642696
fdi |  -.1208743   .0647903    -1.87   0.063    -.2481489    .0064003
spend |   -.061655   .0109351    -5.64   0.000    -.0831361    -.040174
left |   .0005529   .0024729     0.22   0.823     -.004305    .0054107
_cons |   2.791203   .5986255     4.66   0.000     1.615258    3.967147
----------------------------------------------------------------------------

. predict e, resid
(70 missing values generated)

. pwcorr e lgrowth trade lowwage fdi spend left, sig

|        e  lgrowth    trade  lowwage      fdi    spend     left
-----------+---------------------------------------------------------------
e |   1.0000
|
lgrowth |  -0.0000   1.0000
|   1.0000
|
trade |  -0.0000  -0.0787   1.0000
|   1.0000   0.0553
|
lowwage |   0.0000   0.1663  -0.6208   1.0000
|   1.0000   0.0000   0.0000
|
fdi |  -0.0000  -0.1124   0.3373  -0.2562   1.0000
|   1.0000   0.0087   0.0000   0.0000
|
spend |   0.0000  -0.3736   0.5386  -0.4120   0.3258   1.0000
|   1.0000   0.0000   0.0000   0.0000   0.0000
|
left |   0.0000   0.0088   0.1360  -0.1353   0.0552   0.1822   1.0000
|   1.0000   0.8314   0.0007   0.0008   0.1988   0.0000

No matter how small I make the model, I keep finding that the error is
perfectly uncorrelated with the LDV (-lgrowth- in this case). Indeed, it's
perfectly uncorrelated with _everything!_ Exactly the same happens if I:
(1) restrict the model to just the first two explanatory variables; (2)
estimate it with, say, -areg- and then -predict e, resid-, or; (3) if I
change the -predict, resid- option to, say, -rstandard- (which barely
changes the values in the correlation matrix). I don't know about you, but
I think all this is odd.

Any thoughts? Ta.

CLIVE NICHOLAS        |t: 0(044)7903 397793
Politics              |e: [email protected]
Newcastle University  |http://www.ncl.ac.uk/geps

Garrett G and Mitchell D (2001) "Globalization, Government Spending and
Taxation in the OECD" EUR J POLIT RES 39(1): 145-77. The LDV, -lgrowth-,
was created from the -growthpc- variable in their dataset.
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```