Applied Econometrics Lecture 2: Instrumental Variables ...

Applied EconometricsLecture 2: Instrumental Variables , 2 SLS and GMMM ns S derbom 3 September 2009 Introduction Last time we talked about the unobservability problem in Econometrics , and how this impacts onour ability to interpret regression results causally. We discussed how, under certain assumptions, a proxy variable approach can be used to mitigateor even eliminate the bias posed by (for example) omitted Variables . As the name suggests, theproxy variable approach amounts to moving the unobservable variable from the residual to thespeci cation itself. The Instrumental variable approach, in contrast, leaves the unobservable factor in the residualof the structural equation, instead modifying the set of moment conditions used to estimate theparameters. Outline of today s Lecture : Recap & motivation of Instrumental variable estimation Identi cation & de nition of the just identi ed model Two-stage least squares (2 SLS). Overidenti ed models. Generalized method of moments (GMM) Inference & speci cation tests IV estimation in practice - problems posed by weak & invalid :Wooldridge (2002), Chapters 5; ; 8 and 14 Murray, Michael P.

The instrumental variable approach, in contrast, leaves the unobservable factor in the residual ... condition to economic theory is very important for the analysis to be convincing. We return to this at the end of this lecture, drawing on Michael Murray™s (2006) survey paper.

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  Lecture, Analysis, Applied, Variable, Econometrics, Instrumental, Instrumental variables, Applied econometrics lecture 2

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