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A semi-parametric Bayesian approach to the instrumental variable problem

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  • Conley, Timothy G.
  • Hansen, Christian B.
  • McCulloch, Robert E.
  • Rossi, Peter E.

Abstract

We develop a Bayesian semi-parametric approach to the instrumental variable problem. We assume linear structural and reduced form equations, but model the error distributions non-parametrically. A Dirichlet process prior is used for the joint distribution of structural and instrumental variable equations errors. Our implementation of the Dirichlet process prior uses a normal distribution as a base model. It can therefore be interpreted as modeling the unknown joint distribution with a mixture of normal distributions with a variable number of mixture components. We demonstrate that this procedure is both feasible and sensible using actual and simulated data. Sampling experiments compare inferences from the non-parametric Bayesian procedure with those based on procedures from the recent literature on weak instrument asymptotics. When errors are non-normal, our procedure is more efficient than standard Bayesian or classical methods.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 144 (2008)
Issue (Month): 1 (May)
Pages: 276-305

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Handle: RePEc:eee:econom:v:144:y:2008:i:1:p:276-305

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Web page: http://www.elsevier.com/locate/jeconom

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