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The Distribution Of The Instrumental Variables Estimator And Its T-Ratio When The Instrument Is A Poor One

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  • NELSON, C.
  • STARTZ, R.

Abstract

Instrumental variables estimation is used when there is reason to suspect feedback from a dependent variable to the explanatory variable, but the results will tend to be highly misleading if the instrument is a poor one. In this case, the distribution of the estimated coefficient is concentrated around a value that is related to the amount of feedback rather than to the true coefficient. When the true coefficient is zero, the instrumental variables coefficient will nevertheless appear to be highly significant, and this effect increases with the amount of feedback. Thus, it is in the cases where least squares is a poor estimator that instrumental variables with a poor instrument will be even worse. Some guidelines for practice are suggested. Copyright 1990 by the University of Chicago.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Nelson, C. & Startz, R., 1988. "The Distribution Of The Instrumental Variables Estimator And Its T-Ratio When The Instrument Is A Poor One," Discussion Papers in Economics at the University of Washington 88-07, Department of Economics at the University of Washington.
    • Handle: RePEc:fth:washer:88-07
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