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Re: st: 2SLS and Instrumental Variables


From   "Dana Shills" <[email protected]>
To   [email protected]
Subject   Re: st: 2SLS and Instrumental Variables
Date   Fri, 10 Dec 2004 16:56:03 +0000

Dana,

I'm not sure what your question means.
To return to your previous example, why not use ivreg2 as follows:
ivreg2 Y1 X1 X2 (Y2=Z1-Z4), first

I realize that I can use ivreg2 but I am just trying to understand the process of 2SLS and IV better. So in a regression of
regress Y1 X1 X2 Z1-Z4 Y2res
How do I reconcile the two arguments below--
(a) Z1-Z4 should come out to be significant since if we substitute Z1-Z4 by Y2hat, Y2hat comes in significant VERSUS
(b) According to the theory behind IV, there should be no direct causal impact of the instruments on Y1. So Z1-Z4 cannot explain Y1 and hence should not be significant. Is this statement wrong?

Also according to (a) multicollinearity would explain why Z1-Z4 may not come out significant individually but they are jointly significant. Im wondering why multicollinearity shows up when we regress Y1 on Z1-Z4 and not when we regress Y2 on Z1-Z4.

Thanks

Dana

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