Econometrics HT 18

Chapter 26 : Instrumental variables

By Lund University

Instrumental variables are used to handle endogeneity problems

Instrumental variables

When we have endogenous variables, we can sometimes find instruments for them, variables which are correlated with our endogenous variable but not with the error term. This opens for the possibility of consistently estimate the parameters in our model using the instrumental variable estimator and the generalized instrumental variable estimator.

Instrumental variables, one explanatory variable

Instrumental variables, several explanatory variables

Generalized IV

Hausman test for endogenous variables