OLS and IV estimation of regression models including endogenous interaction terms

Maurice Bun () and Teresa Harrison

No 2014-3, School of Economics Working Paper Series from LeBow College of Business, Drexel University

Abstract: We analyze a class of linear regression models including interactions of endogenous regressors and exogenous covariates. We show that, under typical conditions regarding higher-order dependencies between endogenous and exogenous regressors, the OLS estimator of the coefficient of the interaction term is consistent and asymptotically normally distributed. Although not a necessary condition, we demonstrate that multivariate symmetrically distributed data are sufficient for OLS consistency. In general, we propose a Wald test to test for the validity of these higher-order moments. Applying heteroskedasticity-consistent covariance matrix estimators, we then show that standard inference based on OLS is valid for the coefficient of the interaction term. Furthermore, we analyze several IV estimators, and conclude that an implementation exploiting instruments interacted with the exogenous part of the interaction term is to be preferred. Using our theoretical results we con.rm recent empirical findings on the nonlinear causal relation between financial development and economic growth.

Keywords: endogeneity; instrumental variables; interaction term; ordinary least squares (search for similar items in EconPapers)
JEL-codes: C01 C31 C36 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-01-28
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Citations: View citations in EconPapers (48)

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Related works:
Journal Article: OLS and IV estimation of regression models including endogenous interaction terms (2019)
Working Paper: OLS and IV estimation of regression models including endogenous interaction terms (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2014_003

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