Including a lagged dependent variable in an OLS model when autocorrelation exists will:
A) Will lead to unbiased coefficients.
B) Will lead to biased coefficients.
C) Will lead to larger standard errors.
D) Will lead to smaller standard errors.

Question

Quizplus · Accepted Answer

Including a lagged dependent variable in an OLS model when autocorrelation exists will lead to biased coefficients, as it violates the assumption of no autocorrelation. This is because the lagged dependent variable will account for some of the correlation in the error term, leading to overestimation of the true coefficient of the independent variable.

Including a Lagged Dependent Variable in an OLS Model When