[Gretl-users] Re: Allocation of instrumental variables
You are stating that X = {X1, X2, Z1,Z2, Z3, Z4} are uncorrelated with e.
Out of all possible linear combinations of the variables in X that can be
used as an instrument for Ψ1,Ψ2 You should choose the ones that is most
highly correlated with the endogenous variables. Thus you should use the
entire set for each variable. See for example section 5.2.3 - Asymptotic
Efficiency of Two-Stage Least Squares in Wooldridge (2012), Econometric
Analysis of Cross Section and Panel Data, MIT. I would presume that this
correct approach is taken by Gretl.
John C Frain
3 Aranleigh Park
Rathfarnham
Dublin 14
Ireland
www.tcd.ie/Economics/staff/frainj/home.html
https://jcfrain.wordpress.com/
https://jcfraincv19.wordpress.com/
mailto:frainj@tcd.ie
mailto:frainj@gmail.com
On Thu, 10 Aug 2023 at 18:21, <elfsog(a)yahoo.gr> wrote:
Consider the following 2SLS model:
Y= b0 +b1X1+b2X2+θ1Ψ1+θ2Ψ2+e
Where:
Y represents the dependent variable,
X1, X2 denote the endogenous variables,
Ψ1,Ψ2 represent the exogenous variables.
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?
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