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Parsimonious estimation with many instruments

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  • Jan J. J. Groen
  • George Kapetanios

Abstract

We suggest a way to perform parsimonious instrumental variables estimation in the presence of many, and potentially weak, instruments. In contrast to standard methods, our approach yields consistent estimates when the set of instrumental variables complies with a factor structure. In this sense, our method is equivalent to instrumental variables estimation that is based on principal components. However, even if the factor structure is weak or nonexistent, our method, unlike the principal components approach, still yields consistent estimates. Indeed, simulations indicate that our approach always dominates standard instrumental variables estimation, regardless of whether the factor relationship underlying the set of instruments is strong, weak, or absent.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 386.

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Date of creation: 2009
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Handle: RePEc:fip:fednsr:386

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Keywords: Regression analysis ; Statistical methods ; Econometrics;

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Cited by:
  1. Travaglini, Guido, 2010. "Supervised Principal Components and Factor Instrumental Variables. An Application to Violent CrimeTrends in the US, 1982-2005," MPRA Paper 22077, University Library of Munich, Germany.
  2. M. E. Bontempi & I. Mammi, 2012. "A strategy to reduce the count of moment conditions in panel data GMM," Working Papers wp843, Dipartimento Scienze Economiche, Universita' di Bologna.

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