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st: Is it OK to interact an instrumented variable?

From   "Joseph B. Creek" <[email protected]>
To   [email protected]
Subject   st: Is it OK to interact an instrumented variable?
Date   Wed, 31 Aug 2011 00:13:03 -0700 (PDT)



I am unsure about how to deal with this model. I want to estimate

Y = B0 + B1*X1 + B2*X2 + B3*X1*X2 + controls + e

X1 is exogenous and X2 is endogenous. The interaction of X1 and X2 has a clear economic interpretation that I want to investigate empirically. I intend to estimate using IV and have an instrument Z for X2. I have been told I can use Z and Z*X1 as instruments for the endogenous variables X2 and X1*X2. Is this true? Also, does it matter in this case if X1 and X2 are likely related?

Is there any specific command I should use for this?

Your help is much appreciated.
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