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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

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  • Zivot, Eric
  • Startz, Richard
  • Nelson, Charles R

Abstract

The authors investigate confidence intervals and inference for the instrumental variables model with weak instruments. Confidence intervals based on inverting the Lagrange multiplier (LM), likelihood ration (LR), and Anderson-Robin statistics perform far better than the Wald. Performance of the LM and LR statistics is improved by a degrees-of-freedom correction in the overidentified case. The practice of pretesting by looking at the significance of the first-stage regression and then making inference based on the LM or LR statistics leads to better results than pretesting and using the Wald statistic. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Zivot, Eric & Startz, Richard & Nelson, Charles R, 1998. "Valid Confidence Intervals and Inference in the Presence of Weak Instruments," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1119-1146, November.
  • Handle: RePEc:ier:iecrev:v:39:y:1998:i:4:p:1119-46
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    References listed on IDEAS

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    1. 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.
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    15. repec:fth:harver:1435 is not listed on IDEAS
    16. Rotemberg, Julio J, 1984. "Interpreting the Statistical Failures of Some Rational Expectations Macroeconomic Models," American Economic Review, American Economic Association, vol. 74(2), pages 188-193, May.
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    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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