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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

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  • Zivot, Eric
  • Startz, Richard
  • Nelson, Charles R

Abstract

The authors investigate confidence intervals and inference for the instrumental variables model with weak instruments. Confidence intervals based on inverting the Lagrange multiplier (LM), likelihood ration (LR), and Anderson-Robin statistics perform far better than the Wald. Performance of the LM and LR statistics is improved by a degrees-of-freedom correction in the overidentified case. The practice of pretesting by looking at the significance of the first-stage regression and then making inference based on the LM or LR statistics leads to better results than pretesting and using the Wald statistic. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 39 (1998)
Issue (Month): 4 (November)
Pages: 1119-46

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Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:1119-46

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  1. J. Dufour, 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," SFB 373 Discussion Papers 1995,27, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Wang, J. & Zivot, E., 1996. "Inference of a Structural Parameter in Intrumental Variables Regression with weak Instruments," Discussion Papers in Economics at the University of Washington 96-06, Department of Economics at the University of Washington.
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  6. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
  7. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
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  9. Phillips, P.C.B., 1983. "Exact small sample theory in the simultaneous equations model," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 8, pages 449-516 Elsevier.
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  13. Rotemberg, Julio J, 1984. "Interpreting the Statistical Failures of Some Rational Expectations Macroeconomic Models," American Economic Review, American Economic Association, vol. 74(2), pages 188-93, May.
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  17. repec:fth:harver:1435 is not listed on IDEAS
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