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On the Interpretation of Instrumental Variables in the Presence of Specification Errors

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  • Stephen G. Hall,
  • P. A. V. B. Swamy
  • George S. Tavlas

Abstract

The method of instrumental variables (IV) and the generalized method of moments (GMM), and their applications to the estimation of errors-in-variables and simultaneous equations models in econometrics, require data on a sufficient number of instrumental variables that are both exogenous and relevant. We argue that, in general, such instruments (weak or strong) cannot exist.

Suggested Citation

  • Stephen G. Hall, & P. A. V. B. Swamy & George S. Tavlas, 2014. "On the Interpretation of Instrumental Variables in the Presence of Specification Errors," Discussion Papers in Economics 14/19, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:14/19
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    References listed on IDEAS

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    1. Stephen Hall & P. Swamy & George Tavlas, 2012. "Generalized cointegration: a new concept with an application to health expenditure and health outcomes," Empirical Economics, Springer, vol. 42(2), pages 603-618, April.
    2. Xu Cheng & Zhipeng Liao, 2011. "Select the Valid and Relevant Moments: An Information-Based LASSO for GMM with Many Moments, Second Version," PIER Working Paper Archive 13-062, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 21 Oct 2013.
    3. Timothy G. Conley & Christian B. Hansen & Peter E. Rossi, 2012. "Plausibly Exogenous," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 260-272, February.
    4. Guggenberger, Patrik, 2012. "On The Asymptotic Size Distortion Of Tests When Instruments Locally Violate The Exogeneity Assumption," Econometric Theory, Cambridge University Press, vol. 28(2), pages 387-421, April.
    5. Cheng, Xu & Liao, Zhipeng, 2015. "Select the valid and relevant moments: An information-based LASSO for GMM with many moments," Journal of Econometrics, Elsevier, vol. 186(2), pages 443-464.
    6. Swamy, P.A.V.B. & Tavlas, G.S. & Hall, S.G., 2015. "Microproduction Functions With Unique Coefficients And Errors: A Reconsideration And Respecification," Macroeconomic Dynamics, Cambridge University Press, vol. 19(2), pages 311-333, March.
    7. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    8. Pratt, John W. & Schlaifer, Robert, 1988. "On the interpretation and observation of laws," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 23-52.
    9. P. Swamy & George Tavlas, 2007. "The New Keynesian Phillips Curve and Inflation Expectations: Re-Specification and Interpretation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 293-306, May.
    10. Granger Clive W.J., 2008. "Non-Linear Models: Where Do We Go Next - Time Varying Parameter Models?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(3), pages 1-11, September.
    11. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
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    Citations

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    Cited by:

    1. P.A.V.B. Swamy & I-Lok Chang & Jatinder S. Mehta & William H. Greene & Stephen G. Hall & George S. Tavlas, 2016. "Removing Specification Errors from the Usual Formulation of Binary Choice Models," Econometrics, MDPI, vol. 4(2), pages 1-21, June.
    2. Duo Qin, 2019. "Let’s take the bias out of econometrics," Journal of Economic Methodology, Taylor & Francis Journals, vol. 26(2), pages 81-98, April.
    3. Burkhard Raunig, 2017. "On The Interpretation of Instrumental Variables in the Presence of Specification Errors: A Causal Comment," Econometrics, MDPI, vol. 5(3), pages 1-6, July.
    4. Duo Qin & Sophie Van Huellen & Qing-Chao Wang, 2015. "How Credible Are Shrinking Wage Elasticities of Married Women Labour Supply?," Econometrics, MDPI, vol. 4(1), pages 1-31, December.
    5. P.A.V.B. Swamy & Stephen G. Hall & George S. Tavlas & I-Lok Chang & Heather D. Gibson & William H. Greene & Jatinder S. Mehta, 2016. "A Method for Measuring Treatment Effects on the Treated without Randomization," Econometrics, MDPI, vol. 4(2), pages 1-23, March.
    6. P. Dorian Owen, 2017. "Evaluating Ingenious Instruments for Fundamental Determinants of Long-Run Economic Growth and Development," Econometrics, MDPI, vol. 5(3), pages 1-33, September.
    7. Sergio Scicchitano, 2015. "Exploring the gender wage gap in the managerial labour market:a counterfactual decomposition analysis," Working Papers 2, Department of the Treasury, Ministry of the Economy and of Finance.

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    More about this item

    Keywords

    instrumental variables; generalized method of moments; random coefficient models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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