OMITTED VARIABLES, CONFIDENCE INTERVALS, AND THE PRODUCTIVITY OF EXCHANGE RATES

Abstract

Abstract. A new analytical technique, named ‘Bi‐Directional Reiterative Truncated Projected Least Squares’ (BD‐RTPLS), produces reduced form estimations and less than half the error of OLS when there are omitted variables that interact with included variables. This paper develops confidence intervals for BD‐RTPLS and uses BD‐RTPLS to estimate the relationship between the exchange rate (e) and gross domestic product (GDP) using annual data from 1984 to 2000 for 23 developing Asian and Pacific countries. BD‐RTPLS produces estimates for the exchange rate multiplier (dGDP/de) for these countries and shows how omitted variables affected these multipliers across countries and over time.