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Re: st: XTIVREG


From   "Mark Schaffer" <M.E.Schaffer@hw.ac.uk>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: XTIVREG
Date   Wed, 31 Mar 2004 11:49:42 +0100

Giorgio,

Date sent:      	Tue, 30 Mar 2004 22:30:19 +0200
From:           	Giorgio Ricchiuti <ricchiuti.g@tiscali.it>
Subject:        	st: XTIVREG
To:             	statalist@hsphsun2.harvard.edu
Send reply to:  	statalist@hsphsun2.harvard.edu

> Dear all, 
> 
> I've been applying a panel gravity model of this kind:
> 
> xtreg trade gdp pop rer, fe 
> 
> with an obvious simultaneous bias. GDP and POP are my endogenous
> variables and I'd like to instrument them with their lags. Hence, I
> think that my command has to be
> 
> xtivreg trade rer (gdp pop = L.gdp L.pop),fe
> 
> is it correct? how does it work? Are you sure that I've been
> instrumenting GDP with L.GDP and POP with L.POP?

Your last question comes up from time to time on Statalist, e.g.,

http://www.stata.com/statalist/archive/2002-09/msg00098.html

The short answer is that IV doesn't work like that.  All instruments 
are in the instrument matrix.  Heuristically, you want your 
instruments to be "relevant", and you've done that by choosing 
instruments that are going to be correlated with the endogenous 
variables.  But the mechanics of IV don't require you to do any more.

Hope this helps.

--Mark

> thanks a lot Giorgio 
> 
> 


Prof. Mark E. Schaffer
Director
Centre for Economic Reform and Transformation
Department of Economics
School of Management & Languages
Heriot-Watt University, Edinburgh EH14 4AS  UK
44-131-451-3494 direct
44-131-451-3008 fax
44-131-451-3485 CERT administrator
http://www.som.hw.ac.uk/cert
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