CHAPTER 4. INSTRUMENTAL VARIABLES
IV estimator (7) when E = σ2Ω can be reinterpreted as a conve ntional 2SLS estimator applied to the transformed regression Ly = LX β + η using the instruments (L )-1W, where L is a Cholesky array that satisfies LΩL = I. When Ω depends on unknown parameters, it is often possible to use a
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