Factor based identification-robust inference in IV regressions

Massimiliano Marcellino, George Kapetanios and Lynda Khalaf

No 10390, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Robust methods for IV inference have received considerable attention recently. Their analysis has raised a variety of problematic issues such as size/power trade-offs resulting from weak or many instruments. We show that information-reduction methods provide a useful and practical solution to this and related problems. Formally, we propose factor-based modifications to three popular weak-instrument-robust statistics, and illustrate their validity asymptotically and in finite samples. Results are derived using asymptotic settings that are commonly used in both the factor and weak instrument literatures. For the Anderson-Rubin statistic, we also provide analytical finite sample results that do not require any underlying factor structure. An illustrative Monte Carlo study reveals the following. Factor based tests control size regardless of instruments and factor quality. All factor based tests are systematically more powerful than standard counterparts. With informative instruments and in contrast with standard tests: (i) power of factor-based tests is not affected by k even when large, and (ii) weak factor structure does not cost power. An empirical study on a New Keynesian macroeconomic model suggests that our factor-based methods can bridge a number of gaps between structural and statistical modeling.

Keywords: Iv regression; Weak instruments; Identification-robust inference; Factor model; Principle components; New keynesian model (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP10390 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:10390

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP10390

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().