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Judging instrument relevance in instrumental variables estimation

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  • Alastair R. Hall
  • Glenn D. Rudebusch
  • David W. Wilcox

Abstract

Recent research has emphasized the poor finite-sample performance of the instrumental variables estimator when the instruments are weakly correlated with the regressors. The authors show how the canonical correlations between regressors and instruments can provide a measure of instrument relevance in the general multiple-instrument-multiple-regressor case. However, their simulation results indicate that any such relevance measure probably has little practical merit, as its use may actually exacerbate the poor finite-sample properties of the instrumental variables estimator. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Suggested Citation

  • 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.).
  • Handle: RePEc:fip:fedgfe:94-3
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    Econometrics;

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