How Can the Error Term Be Correlated with the Explanatory Variables on the R.H.S. of a Model?

Abstract

Since macroeconomic research cannot be replicated, most studies may claim their conclusive research findings solely based on the statistical significance of the estimated coefficients. In this framework, we use a small simulation experiment to show that if variables affect the economy through different horizons, even though the error term is not correlated with both the explanatory variables on the right-hand side (R.H.S.) of a model and the dependent variable from a traditional view, the estimated coefficients can still be biased. The evidence provided by this paper may explain the refutation and controversy results in the modern research.