Optimal linear instrumental variables approximations

DOI10.1016/J.JECONOM.2020.05.002MaRDI QIDQ2225014zbMATH OpenOpenAlexWikidataFDO

Authors Yanyan Li

Publication date 4 February 2021

Published in Journal of Econometrics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1805.03275

zbMATH Keywords

Hausman testinstrumental variablesmisspecificationnonparametric identificationlinear approximation

Mathematics Subject Classification ID

Nonparametric estimation (62G05) Nonparametric regression and quantile regression (62G08) Applications of statistics to economics (62P20)

Abstract: This paper studies the identification and estimation of the optimal linear approximation of a structural regression function. The parameter in the linear approximation is called the Optimal Linear Instrumental Variables Approximation (OLIVA). This paper shows that a necessary condition for standard inference on the OLIVA is also sufficient for the existence of an IV estimand in a linear model. The instrument in the IV estimand is unknown and may not be identified. A Two-Step IV (TSIV) estimator based on Tikhonov regularization is proposed, which can be implemented by standard regression routines. We establish the asymptotic normality of the TSIV estimator assuming neither completeness nor identification of the instrument. As an important application of our analysis, we robustify the classical Hausman test for exogeneity against misspecification of the linear structural model. We also discuss extensions to weighted least squares criteria. Monte Carlo simulations suggest an excellent finite sample performance for the proposed inferences. Finally, in an empirical application estimating the elasticity of intertemporal substitution (EIS) with US data, we obtain TSIV estimates that are much larger than their standard IV counterparts, with our robust Hausman test failing to reject the null hypothesis of exogeneity of real interest rates.

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Cited in

(8)

• On the equivalence of instrumental variables estimators for linear models
• Optimal Individualized Decision Rules Using Instrumental Variable Methods
• Locally Robust Semiparametric Estimation
• Irregular identification of structural models with nonparametric unobserved heterogeneity
• Optimal inference for instrumental variables regression with non-Gaussian errors
• OLS and IV estimation of regression models including endogenous interaction terms
• Optimal instrumental variables estimation for ARMA models
• SEMIPARAMETRIC IDENTIFICATION AND FISHER INFORMATION

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