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

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 ( d GDP/ d e) for these countries and shows how omitted variables affected these multipliers across countries and over time.