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On the Behavior of Inconsistent Instrumental Variable Estimators

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Author Info
Esfandier Maasoumi (University of Southern California)
Peter C.B. Phillips () (Cowles Foundation, Yale University)

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Abstract

Results published recently by Hendry (1979) for the limiting distribution of inconsistent instrumental variable estimators in misspecified dynamic systems are incorrect. In particular, Hendry's derivations involve the use of an appropriate control variate and lead to an expression for the covariance matrix of the limiting distribution which, in general, omits many additional terms. Correct formulae are given in the present paper and the accuracy of the asymptotic distribution in finite samples is investigated in a simple case using the know exact small sample distribution. On the basis of our exact results, we argue for caution in the use of response surface regressions of the type recommended by Hendry in Monte Carlo experiments; and we emphasize the need for qualifying statements concerning the parameter environments in which the adequacy of these regressions has been substantiated.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 568.

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Length: 24 pages
Date of creation: Dec 1980
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Publication status: Published in Journal of Econometrics (1982), 19: 183-201
Handle: RePEc:cwl:cwldpp:568

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  1. Neil R. Ericsson, 1987. "Monte Carlo methodology and the finite sample properties of statistics for testing nested and non-nested hypotheses," International Finance Discussion Papers 317, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Neil R. Ericsson, 1986. "Post-simulation analysis of Monte Carlo experiments: interpreting Pesaran's (1974) study of non-nested hypothesis test statistics," International Finance Discussion Papers 276, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Hnatkovska, Viktoria & Marmer, Vadim & Tang, Yao, 2008. "Comparison of Misspecified Calibrated Models: The Minimum Distance Approach," Micro Theory Working Papers vadim_marmer-2008-14, Microeconomics.ca Website, revised 02 Nov 2009. [Downloadable!]
  4. Jan F. Kiviet & Jerzy Niemczyk, 2006. "The Asymptotic and Finite Sample Distributions of OLS and Simple IV in Simultaneous Equations," Tinbergen Institute Discussion Papers 06-078/4, Tinbergen Institute. [Downloadable!]
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  5. Partha Deb & James F. Burgess, Jr., 2003. "A Quasi-experimental Comparison of Econometric Models for Health Care Expenditures," Hunter College Department of Economics Working Papers 212, Hunter College: Department of Economics. [Downloadable!]
  6. Alastair R. Hall & Atsushi Inoue, 2005. "The Large Sample Behaviour of the Generalized Method of Moments Estimator in Misspecified Models," Econometrics 0505002, EconWPA. [Downloadable!]
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