[Gretl-users] Re: Allocation of instrumental variables

On 10/08/2023 20:21, Alecos Papadopoulos wrote: > >> To address endogeneity in the model, a set of four instruments, is >> introduced. Two instruments (Z1 and Z2) are employed to instrument >> for X1, while two other instruments (Z3 and Z4) are used to >> instrument for X2. >> My question is: How Gretl understand which instrument stands for >> which endogenous variable? From an econometric point of view, there is an ambiguity in the original post that must be resolved before explaining how to do things in gretl, as Alecos rightly pointed out. A common misconception in IV estimation is that a given instrument is related to a given endogenous variable. This is by no means true in general. Generally speaking, ALL instruments are used for ALL endogenous variables. Having said this, it is perfectly possible to impose constraints in the "first-stage" regression, for example by stipulating that some of the instruments don't enter some of the equations. But in order to do so, you can't rely on the plain IV estimator and you have to use a different estimator (maximum likelihood, or possibly GMM).