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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

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Author Info

  • Zivot, E
  • Startz, R
  • Nelson, C-R

Abstract

We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals for a structural parameter perform poorly in that the probability they reject the null is far greater than their nominal size. We show that the preactice of "pre-testing" by looking at the significance of the fist-stage regression and then making inference based on the Wald statistic leads to extremely poor results when the instruments are very weak.

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Bibliographic Info

Paper provided by Department of Economics at the University of Washington in its series Discussion Papers in Economics at the University of Washington with number 97-17.

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Length: 22 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:washer:97-17

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Keywords: STATISTICS;

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References

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  1. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  2. 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.
  3. Robert E. Hall, 1981. "Intertemporal Substitution in Consumption," NBER Working Papers 0720, National Bureau of Economic Research, Inc.
  4. Angrist, Joshua D & Krueger, Alan B, 1991. "Does Compulsory School Attendance Affect Schooling and Earnings?," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 979-1014, November.
  5. Jiahui Wang & Eric Zivot, 1996. "Inference on a Structural Parameter in Instrumental Variables Regression with Weak Instruments," Econometrics 9610005, EconWPA.
  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. Peter C.B. Phillips, 1982. "Exact Small Sample Theory in the Simultaneous Equations Model," Cowles Foundation Discussion Papers 621, Cowles Foundation for Research in Economics, Yale University.
  8. repec:att:wimass:9312 is not listed on IDEAS
  9. Fuhrer, Jeffrey C. & Moore, George R. & Schuh, Scott D., 1995. "Estimating the linear-quadratic inventory model Maximum likelihood versus generalized method of moments," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 115-157, February.
  10. Hall, Alastair R & Rudebusch, Glenn D & Wilcox, David W, 1996. "Judging Instrument Relevance in Instrumental Variables Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(2), pages 283-98, May.
  11. repec:fth:harver:1435 is not listed on IDEAS
  12. Bowden,Roger J. & Turkington,Darrell A., 1990. "Instrumental Variables," Cambridge Books, Cambridge University Press, number 9780521385824, October.
  13. Nelson, Charles R & Startz, Richard, 1990. "Some Further Results on the Exact Small Sample Properties of the Instrumental Variable Estimator," Econometrica, Econometric Society, vol. 58(4), pages 967-76, July.
  14. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  15. 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.
  16. Maddala, G S, 1974. "Some Small Sample Evidence on Tests of Significance in Simultaneous Equations Models," Econometrica, Econometric Society, vol. 42(5), pages 841-51, September.
  17. D. Klepinger & S. Lundberg & R. Plotnick, . "Instrument selection: The case of teenage childbearing and women's educational attainment," Institute for Research on Poverty Discussion Papers 1077-95, University of Wisconsin Institute for Research on Poverty.
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