Instrumental Variables

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ripperpool
Posts: 3
Joined: Sat Mar 07, 2009 8:47 am

Instrumental Variables

Postby ripperpool » Wed Jul 29, 2009 3:28 pm

Anybody has any idea about them? Can I refer to any notes or online material regarding these as I am still a newbie at this :shock:
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startz
Non-normality and collinearity are NOT problems!
Posts: 3775
Joined: Wed Sep 17, 2008 2:25 pm

Re: Instrumental Variables

Postby startz » Wed Jul 29, 2009 5:47 pm

The wikipedia entry is not bad.
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suki1121
Posts: 2
Joined: Thu Aug 06, 2009 2:14 pm

Re: Instrumental Variables

Postby suki1121 » Thu Aug 06, 2009 3:29 pm

it is used in the case when the initial assumptions about x and error term do not hold.

e.g. if x and error are correlated, we need an IV that is highly correlated with x but uncorrelated with error, say z.

then two stage least square applies, 1st, regress x on z to get x hat; 2nd regree y on x hat.

i hope my ans is clear. :wink:
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startz
Non-normality and collinearity are NOT problems!
Posts: 3775
Joined: Wed Sep 17, 2008 2:25 pm

Re: Instrumental Variables

Postby startz » Thu Aug 06, 2009 3:34 pm

suki1121 wrote: we need an IV that is highly correlated with x but uncorrelated with error, say z.

then two stage least square applies, 1st, regress x on z to get x hat; 2nd regree y on x hat.
:wink:


although you should use the EViews command TSLS. Don't run two separate regressions.
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