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Resurgence of instrument variable estimation and fallacy of endogeneity

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  • Qin, Duo

Abstract

This paper investigates the nature of the IV method for tackling endogeneity. By tracing the rise and fall of the method in macroeconometrics and its subsequent revival in microeconometrics, it pins the method down to an implicit model respecification device - breaking the circular causality of simultaneous relations by redefining it as an asymmetric one conditioning on a non-optimal conditional expectation of the assumed endogenous explanatory variable, thus rejecting that variable as a valid conditional variable. The revealed nature explains why the IV route is popular for models where endogeneity is superfluous whereas measurement errors are of the key concern.

Suggested Citation

  • Qin, Duo, 2014. "Resurgence of instrument variable estimation and fallacy of endogeneity," Economics Discussion Papers 2014-42, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwedp:201442
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    References listed on IDEAS

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    More about this item

    Keywords

    endogeneity; instrumental variables; simultaneity; omitted variable bias; multicollinearity;
    All these keywords.

    JEL classification:

    • B23 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Econometrics; Quantitative and Mathematical Studies
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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