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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 University of Washington, Department of Economics in its series Working Papers with number 97-17.

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Length: 22 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:udb:wpaper:97-17

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Keywords: STATISTICS;

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References

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  1. 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.
  2. 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.
  3. repec:fth:harver:1435 is not listed on IDEAS
  4. 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.
  5. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-57, April.
  6. 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.
  7. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  8. 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.
  9. Jiahui Wang & Eric Zivot, 1996. "Inference on a Structural Parameter in Instrumental Variables Regression with Weak Instruments," Econometrics 9610005, EconWPA.
  10. repec:att:wimass:9312 is not listed on IDEAS
  11. Nelson, C. & Startz, R., 1988. "Some Furthere Results On The Exact Small Sample Properties Of The Instrumental Variable Estimator," Discussion Papers in Economics at the University of Washington 88-06, Department of Economics at the University of Washington.
  12. 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.
  13. Alastair R. Hall & Glenn D. Rudebusch & David W. Wilcox, 1994. "Judging instrument relevance in instrumental variables estimation," Finance and Economics Discussion Series 94-3, Board of Governors of the Federal Reserve System (U.S.).
  14. Bowden,Roger J. & Turkington,Darrell A., 1990. "Instrumental Variables," Cambridge Books, Cambridge University Press, number 9780521385824.
  15. 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.
  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. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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