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Re: st: IV list in ivreg and ivreg2

From   Eddy <>
Subject   Re: st: IV list in ivreg and ivreg2
Date   Mon, 19 Apr 2004 08:36:15 -0700 (PDT)

Hi Mark,

Thanks for your reply; please see my response below.

Monday, April 19, 2004, Mark Schaffer wrote:

>> Dear listers,
>> When using ivreg or ivreg2 to do a 2SLS estimation, all the RHS
>> variables except those explicitly specified as endogenous are
>> to be exogenous and valid IV. Call those the "included exogenous
>> variables". However, I happen to have a case in which not all the
>> "included exogenous variables" are valid IV, and I am asking
>> users can have better control over the list of IV to be used in
>> 2SLS estimation.

> I'm not sure this makes sense.  A "valid" IV is one that satisfies 
> the orthogonality conditions; this is synonymous with "exogenous". 

> If one of your regressors isn't a valid IV, then it isn't exogenous

> and you need to treat it as endogenous.  This is the way that IV 
> works (or, in modern presentations, GMM with IV as a special case).

> In your example, ln(P) might or might not be be orthogonal to the 
> disturbance term.  If it is, it's a valid IV and you can treat it
> exogenous; if it isn't, it's not a valid IV and you should treat it

> as endogenous.  It sounds like you lean towards the latter, which 
> looks like a reasonable way to proceed (so long as you have enough 
> other valid excluded instruments to identify the equation, and they

> are "relevant" as well as "valid").

  ln(W/P) = a0 + a1*ln(P) + a2*y + B*X,

It's correct that ln(P) is endogenous because the dependent variable
is ln(W/P)=ln(W) - ln(P), but the problem is that I do not want to
deal with the endogeneity of ln(P), and I don't want it to be part of
the IV for the other endogenous variable, y, whose coefficient is the
ultimate concern of this study.

I do not want to treat the endogeneity of ln(P) because (1) the ln(P)
variable is only to control for heterogenous preference, and we do
really care about the coefficient of ln(P), (2) to the extent that
ln(P) are independent of y and X, the endogeneity problem of ln(P)
does not have adverse effect on the coefficients of y and X, (3) the
work I want to follow/replicate does not treat its endogeneity
(Carroll and Samwick, "The Nature of Precautionary Wealth", Journal
Monetary Economics, 1997), and (4) good IV for ln(P) maybe difficult
to come by.

I know this is a rather uncommon case, so I would appreciate any


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