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Are "Nearly Exogenous Instruments" reliable?

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  • Berkowitz, Daniel
  • Caner, Mehmet
  • Fang, Ying

Abstract

We show that when instruments are nearly exogenous, the two stage least squares t-statistic unpredictably over-rejects or under-rejects the null hypothesis that the endogenous regressor is insignificant and Anderson-Rubin test over-rejects the null. We prove that in the limit these tests are no longer nuisance parameter free.

Suggested Citation

  • Berkowitz, Daniel & Caner, Mehmet & Fang, Ying, 2008. "Are "Nearly Exogenous Instruments" reliable?," Economics Letters, Elsevier, vol. 101(1), pages 20-23, October.
    • Handle: RePEc:eee:ecolet:v:101:y:2008:i:1:p:20-23
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    Keywords

    C30 Valid instruments Weak identification Inference;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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