Discussion Paper Details

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Title: Temporal Aggregation Bias in Stock-Flow Models

Author(s): Kenneth Burdett, Melvyn G Coles and Jan C. van Ours

Publication Date: May 1994

Keyword(s): Matching and Temporal Aggregation Bias

Programme Area(s): Human Resources

Abstract: The matching function describes the flow of job creation as a function of the stocks of unemployed and vacancies. Most empirical work tries to identify such a relationship by regressing the flow of matches (aggregated over the month) on the stocks of unemployment and vacancies measured at the beginning of that month. It is shown that estimates obtained using this procedure will be downward biased if unemployment and vacancies are mean-reverting processes. If the bias is small, the size of the bias is proportional to the length of the period interval. By further aggregating the data, say from monthly to quarterly data, the downward bias should triple. The resulting change in the parameter estimates can then be used to estimate the size of the original bias.

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Bibliographic Reference

Burdett, K, Coles, M and van Ours, J. 1994. 'Temporal Aggregation Bias in Stock-Flow Models'. London, Centre for Economic Policy Research.