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Title:Factor-GMM estimation with large sets of possibly weak instruments PDF Logo
Authors:Kapetanios, George
Marcellino, Massimiliano
Issue Date:2006
Series/Report no.:Working Paper, Department of Economics, Queen Mary, University of London 577
Abstract:This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. We consider cases where the unobserved factors are the optimal instruments but also cases where the factors are not necessarily the optimal instruments but can provide a summary of a large set of instruments. Further, the situation where many weak instruments exist is also considered in the context of factor models. Theoretical results, simulation experiments and empirical applications highlight the relevance and simplicity of Factor-GMM estimation.
Subjects:Factor models, Principal components, Instrumental variables, GMM, Weak instruments, DSGE models
JEL:C32
C51
E52
Document Type:Working Paper
Appears in Collections:Working Paper Series, School of Economics and Finance, Queen Mary, University of London

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