A new criterion for selecting valid instruments

Ratbek Dzhumashev and Ainura Tursunalieva

No 04-19, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper develops a new criterion for selecting a valid instrumental variable (IV). This criterion imposes directional restrictions on an instrument in-formed by the sign of the covariance between the error term and the endogenous variable cov(X,u). We show that a valid IV for the case when cov(X,u) > 0 is not suitable for the case when cov(X,u)

Keywords: two-stage least squeare estimation; instrumental variable; vailidty test (search for similar items in EconPapers)
JEL-codes: C18 C26 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2019-06
New Economics Papers: this item is included in nep-ecm
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