RE: st: ivreg with an interaction

 From "A. Mushfiq Mobarak" To , Subject RE: st: ivreg with an interaction Date Wed, 27 Nov 2002 13:58:25 -0700

```Prof. Chan:

If M is an instrument for X that doesn't appear in your second stage, I
would suggest using M*Y as an instrument for X*Y.  Note that M*Y is NOT
a linear function of M and Y, which is why this is possible to do.

You would first generate the variables XY and MY and then do this in
ivreg:

ivreg Z (X XY = M MY) Y

All the std. errors would be automatically calculated properly.

If you still want to instrument for X with just M (excluding MY), and
then substitute Xhat*Y for XY in the second stage, you would have to
One procedure for doing this is bootstrapping. See the stata manual.

Mushfiq

A. Mushfiq Mobarak
Assistant Professor of Economics
303-492-8872

Date: Tue, 26 Nov 2002 14:38:02 -0500
From: "Sewin Chan" <sewin.chan@nyu.edu>
Subject: st: ivreg with an interaction

Hello,

I am trying to estimate the following model using instrumental
variables. The final stage has two independent variables of interest,
plus an interaction between them:

Z = aX + bY + c(X*Y) + more variables

I want to instrument variable X in a first stage regression using a set
of instruments that contain Y and some other variables that are not in
the final stage.  Of course the variable X*Y will have to reflect this
instrumenting as well.

How can I use ivreg to do this?   I can't figure out how I can use the
first
stage to predict X, and then use it in the final stage both by itself
and as an interaction.

If ivreg can't do this, I know I can still get coefficients by
estimating 2 separate regressions in sequence using the predicted values
of X in the final stage, but how do I correct the standard errors?  To
make things more complicated, I also want to use robust and cluster( ).

Thank you for any suggestions.

Sewin Chan

Assistant Professor of Public Policy
New York University

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```