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Department of Economics
University of Munich
Winter Semester 2014/15
3. Instrumental variables
3.1
3.2
3.3
(W 5.2.15.2.5)
3.4
IV estimation in practice
(W 5.2.6)
3.5
(W 6.3.1, 6.3.2)
(W 5.1.1, 5.1.2)
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32
(2)
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34
35
(3)
where v = u + K rk , j = j + K j , 1 = K 1 .
Amelie Wuppermann, Econometrics, Winter Semester 2014/15
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E(z y)
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b =
z i xi
zi yi
N i=1
N i=1
= (Z X)
(Z Y )
(4)
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We have M instruments,
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(5)
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Y .
b = X
X
X
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schooling.
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(6)
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b =
n
X
i=1
n
X
i=1
xizi
xizi
n
X
i=1
n
X
i=1
zi zi
!1
zi zi
!1
n
X
i=1
n
X
i=1
!1
zi xi
zi yi
(7)
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b
.
N N 0, E(x z) [E(z z)] E(z x)
Amelie Wuppermann, Econometrics, Winter Semester 2014/15
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z, and
2
P
N
1
b .
the formula
b2 = N K
i=1 yi xi
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E bOLS
= + E (X X) X u
h
i
1
= + E (X X) X E(u|X) = .
E bIV
= + E (Z X) Z u
h
i
1
= + E (Z X) Z E(u|Z, X) 6= !
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b
plim IV = plim +
(Z X)
(Z u)
N
N
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cov(z1, u)
u corr(z1, u)
b
plim 1,IV = 1 +
= 1 +
.
cov(z1, x1)
x1 corr(z1, x1)
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Low
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Textbook tips:
Brief: Cameron and Trivedi (2005), Section 4.9.1
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2SLS estimates are consistent, but much less precise and often
even insignificant.
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b
[
= (x z) z z (z x)
Avar IV
[ bOLS
Avar
2
/x x
=
=
,
2
(z x) /[(z z)(x x)]
rxz
where for simplification we use the somewhat unusual notation
x = (x1, . . . , xN ) and z = (z1, . . . , zN ).
1 < rxz < 1 is the sample correlation coefficient between x and
z.
Shea (1997) derives a similar formula for the general case.
Amelie Wuppermann, Econometrics, Winter Semester 2014/15
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where vb2 is the residual from the reduced form regression for y2.
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(8)
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