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st: Instrument validity
"Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>
st: Instrument validity
Fri, 21 Nov 2008 19:17:10 -0000
Not sure why this didn't go through the first time, so if at first you don't succeed....
From: Schaffer, Mark E
Sent: 21 November 2008 14:59
Subject: RE: Instrument validity
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> In Stata list
> (http://www.stata.com/statalist/archive/2006-06/msg00461.html) I found
> the folling:
> "Reverse causality in the first stage is irrelevant to consistency of
> LIML (or 2SLS etc.)."
> Does this mean the excluded instrument be correlated with the error in
> the first regression as long as it is not correlated with the error in
> the main equation (and is, of course, correlated with the endogenous
You mean, "Does this mean the excluded instrument CAN be correlated with the error in the first [stage] regression?" The answer is yes. The requirement of orthogonality applies only to the main equation.
This is because IV/2SLS and LIML are single-equation, "limited information" estimators. The "first-stage" equation is an auxiliary step but isn't part of the model - there are no model parameters there. If you want your first-stage equation to be interpreted as a model equation, then you are in the land of system estimation, 3SLS, FIML, etc., and you need to take a new set of baggage with you.
Prof. Mark Schaffer
Department of Economics
School of Management & Languages
Edinburgh EH14 4AS
tel +44-131-451-3494 / fax +44-131-451-3296
> I am doing an ivreg2 model and my excluded instrument does not reject
> the null in the orthog() test but if, on a side, I do a
> Hausman test for
> its exogeneity in the first regression, I reject the null.
> Is the instrument valid anyway?
> Any help would be most appreciated. Thank you.
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