A Note on the Theme of Too Many Instruments
The difference and system generalized method of moments (GMM) estimators are growing in popularity. As implemented in popular software, the estimators easily generate instruments that are numerous and, in system GMM, potentially suspect. A large instrument collection overfits endogenous variables even as it weakens the Hansen test of the instruments' joint validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating <link rid="b22">Forbes ["American Economic Review" (2000)</link> Vol. 90, pp. 869-887] on income inequality and <link rid="b26">Levine "et al." ["Journal of Monetary Economics"] (2000)</link> Vol. 46, pp. 31-77] on financial sector development. Results in both papers appear driven by previously undetected endogeneity. Copyright (c) Center for Global Development 2009.
Year of publication: |
2009
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Authors: | Roodman, David |
Published in: |
Oxford Bulletin of Economics and Statistics. - Department of Economics, ISSN 0305-9049. - Vol. 71.2009, 1, p. 135-158
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Publisher: |
Department of Economics |
Saved in:
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