Iv Estimation
Instrumental variables and panel data methods in economics and finance
Christopher F Baum
Boston College and DIW Berlin
February 2009
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
1 / 43
Instrumental variables estimators
Regression with Instrumental Variables
What are instrumental variables (IV) methods? Most widely known as a solution to endogenous regressors: explanatory variables correlated with the regression error term, IV methods provide a way to nonetheless obtain consistent parameter estimates. Although IV estimators address issues of endogeneity, the violation of the zero conditional mean assumption caused by endogenous regressors can also arise for two other common causes: measurement error in regressors (errors-in-variables) and omitted-variable bias. The latter may arise in situations where a variable known to be relevant for the data generating process is not measurable, and no good proxies can be found.
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
2 / 43
Instrumental variables estimators
Regression with Instrumental Variables
What are instrumental variables (IV) methods? Most widely known as a solution to endogenous regressors: explanatory variables correlated with the regression error term, IV methods provide a way to nonetheless obtain consistent parameter estimates. Although IV estimators address issues of endogeneity, the violation of the zero conditional mean assumption caused by endogenous regressors can also arise for two other common causes: measurement error in regressors (errors-in-variables) and omitted-variable bias. The latter may arise in situations where a variable known to be relevant for the data generating process is not measurable, and no good proxies can be found.
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
2 / 43
Instrumental variables estimators
First let us consider a path diagram illustrating the problem
Christopher F Baum
Boston College and DIW Berlin
February 2009
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
1 / 43
Instrumental variables estimators
Regression with Instrumental Variables
What are instrumental variables (IV) methods? Most widely known as a solution to endogenous regressors: explanatory variables correlated with the regression error term, IV methods provide a way to nonetheless obtain consistent parameter estimates. Although IV estimators address issues of endogeneity, the violation of the zero conditional mean assumption caused by endogenous regressors can also arise for two other common causes: measurement error in regressors (errors-in-variables) and omitted-variable bias. The latter may arise in situations where a variable known to be relevant for the data generating process is not measurable, and no good proxies can be found.
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
2 / 43
Instrumental variables estimators
Regression with Instrumental Variables
What are instrumental variables (IV) methods? Most widely known as a solution to endogenous regressors: explanatory variables correlated with the regression error term, IV methods provide a way to nonetheless obtain consistent parameter estimates. Although IV estimators address issues of endogeneity, the violation of the zero conditional mean assumption caused by endogenous regressors can also arise for two other common causes: measurement error in regressors (errors-in-variables) and omitted-variable bias. The latter may arise in situations where a variable known to be relevant for the data generating process is not measurable, and no good proxies can be found.
Christopher F Baum (Boston College)
IVs and Panel Data
Feb 2009
2 / 43
Instrumental variables estimators
First let us consider a path diagram illustrating the problem