Factor-GMM Estimation with Large Sets of Possibly Weak Instruments
AbstractThis paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. We consider cases where the unobserved factors are the optimal instruments but also cases where the factors are not necessarily the optimal instruments but can provide a summary of a large set of instruments. Further, the situation where many weak instruments exist is also considered in the context of factor models. Theoretical results, simulation experiments and empirical applications highlight the relevance and simplicity of Factor-GMM estimation.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 577.
Date of creation: Oct 2006
Date of revision:
Factor models; Principal components; Instrumental variables; GMM; Weak instruments; DSGE models;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-04 (All new papers)
- NEP-ECM-2006-11-04 (Econometrics)
- NEP-ETS-2006-11-04 (Econometric Time Series)
- NEP-MAC-2006-11-04 (Macroeconomics)
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