I am interested in estimating the following equation:
X = a + bY + cM + error
where X, Y, and M are variables and a, b, and c are paremeters to be
estimated. Y is also determined by X as follows:
Y = d + eX + fD + eM + fZ + error
where Z = D*M.
My question: Can I estimate this system using 2SLS with D, M, and Z as
instruments for Y? My concern is that Z = D*M and M is in the first
equation.
Thanks.
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