st: Re: collinearity in IV

[Kit Baum <baum@bc.edu>]

Binzhen was puzzled about what ivreg2 did here. The instrument set he 
has specified is

(iota T X W V TW TV)

where as I understand it TW = T*W, TV = T*V.  He should be able to see 
what is happening in the estimation by using the -first- option.

In an earlier message he suggested that he wanted to take the 
instrument generated by regressing Z on the above list and multiply it 
by T (the time dummy) and run a regression of Y on Z*, TZ*, T and X 
where Z* is an instrument for Z, TZ* = T * Z*. But that OLS regression 
(which could be run) will not be the instrumental variables estimator. 
The instrumental variables estimator regresses each endogenous variable 
(i.e., potentially correlated with error term) on the set of 
instruments above, and uses both the instruments and the original data 
in deriving the IV results and their consistent covariance matrix. You 
cannot pick and choose which RHS variables are to be instrumented by 
which variables; that is not IV from the standpoint of econometric 
theory.

I suspect that examination of the first stage regression results will 
shed some light on the problems that Binzhen reports regarding the 
covariance matrix of the moment conditions. He might want to use ivreg2 
without the gmm option (as I suspect he is doing).

Kit Baum, Boston College Economics
http://ideas.repec.org/e/pba1.html

On May 5, 2005, at 2:33 AM, Binzhen wrote:


> I am runing the following model:
> Y=aT+bZ+cTZ+dX,
> Here,  TZ=T*Z is the interaction term, T is the time dummy (=1 after
> the policy change), and Z are the continuous endogenous treatments, X
> are exogenous variables.
>
> The command I use is: ivreg2 Y T X (TZ Z=W V TW TV)
>
> I got an error message for the first stage regression:
>
> Error: covariance matrix of moment conditions not of full rank;
> specification
>        test stats not reported and standard errors above may be
> meaningless.
*
*   For searches and help try:
*   http://www.stata.com/support/faqs/res/findit.html
*   http://www.stata.com/support/statalist/faq
*   http://www.ats.ucla.edu/stat/stata/