Oh NO! I got the Wrong Sign! What Should I do?

thumbnail of oh_no_I_got_the_wrong_sign Original by P. Kennedy, 2002, 18 pages 

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  • A wrong sign can be considered a blessing not a disaster. Getting a wrong sign is a friendly message that some detective work needs to be done
  • 19 example, mostly due to foolishness
  • First commandments of applied econometrics: Use common Sense
  • Studies obtained wrong sign because they used nominal rather than real interest rate explaining consumer spending
  • One of the casual indicators of Multicolinearity is the presence of “wrong” sign. Solution is to introduce additional information by using the ratio of the two prices as the explanatory variable rather than their levels
  • Use Heckman two-stage correction for correction of selection bias
  • Check for presence of outliers
  • Suppose you believe that x affects y positively but there is a lag involved. You regress yt on xt and xt-1 and are surprised to find a negative coefficient for xt-1. The explanation is that the long-run impact of x is smaller that its short-run impact