Endogeneity (econometrics)
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The problem of endogeneity in econometrics occurs when the independent variable is correlated with the error term in a regression model. This can occur when there is feedback between dependent and independent variable (two-way causality). This implies that the regression coefficient in an OLS regression is biased. Therefore, in this case one should use instrumental variable regression instead of OLS.
The endogeneity problem is particularly relevant in the context of time series analysis of causal processes. It is common for some factors within a causal system to be dependent for their value in period n on the values of other factors in the causal system in period n-1. Suppose that the level of pest infestation is independent of all other factors within a given period, but is influenced by the level of rainfall and fertilizer in the preceding period. In this instance it would be correct to say that infestation is exogenous within the period, but endogenous over time.
