Suppose the U.S. Federal Reserve raised its interest rate by 1 percentage point between 2014 and 2015, but the Bank of Canada made no change in its interest rate. You estimate the following model in an attempt to assess the effect of the change in interest rate on the unemployment rate:Unemploymentit = ?0 + ?1U.S.it + ?2Y2015it + ?3U.S.it × Y2015it + UitHere, U.S.it is a dummy variable equaling one if the observation is in the U.S. and Y2015it is a dummy variable equaling one if the observation is in 2015. Which of the following variables may generate an endogeneity problem when attempting to use the estimate for the diff-in-diff (?3) as the effect of the interest rate change?
A. The difference in average labor force participation between U.S. and Canada
B. Changes in international immigration laws between 2014 and 2015
C. Changes in overall level of trade in North American between 2014 and 2015
D. Changes in the U.S. fiscal policy between 2014 and 2015
Answer: D
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