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st: xtivreg2

From   natasha agarwal <>
Subject   st: xtivreg2
Date   Fri, 4 Feb 2011 15:15:44 +0000

Dear Statalist,

I have a question relating to the use of xtivreg2.

I am estimating a cobb-douglas production function where I am regressing

Y = L+K+CF+FDI+CF*FDI+year dummies+error

I believe that cash flow (CF)and output (Y) in the above regression
have reverse causality, i.e. CF determines Y but Y could also
determine CF.

So I thought instrumenting CF would be the best idea to break the
reverse causality.

To do so I first differenced the above equation and then used lags
levels of CF of year 2 and year 3 as the instrument.

However, I don't know how would one do the instrumenting when the
endogenous variable is interacted with the exogenous variable??

I would be grateful if anyone could help me on this.

Many thanks
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