Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/60807
Authors: 
Groen, Jan J. J.
Kapetanios, George
Year of Publication: 
2009
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 386
Abstract: 
We suggest a way to perform parsimonious instrumental variables estimation in the presence of many, and potentially weak, instruments. In contrast to standard methods, our approach yields consistent estimates when the set of instrumental variables complies with a factor structure. In this sense, our method is equivalent to instrumental variables estimation that is based on principal components. However, even if the factor structure is weak or nonexistent, our method, unlike the principal components approach, still yields consistent estimates. Indeed, simulations indicate that our approach always dominates standard instrumental variables estimation, regardless of whether the factor relationship underlying the set of instruments is strong, weak, or absent.
Subjects: 
Instrumental variables estimation
many instruments
factor models
JEL: 
C30
C59
C13
Document Type: 
Working Paper

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