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A History of Polyvalent Structural Parameters: the Case of Instrument Variable Estimators

Duo Qin and Yanqun Zhang
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Yanqun Zhang: IQTE,Chinese Academhy of Social Sciences, China

No 183, Working Papers from Department of Economics, SOAS University of London, UK

Abstract: This paper investigates the rise and fall of the IV method in macro-econometric models and its subsequent revival in micro-econometric models. The key findings are: (i) the IV method implicitly breaks the contemporaneously circular causality postulated in a simultaneousequation model (SEM) by redefining the conditional variable concerned as a suboptimal conditional expectation of it; (ii) the IV method falls out of favour in macro-econometrics mainly because of lack of empirical validations for such redefinitions; (iii) the IV method wins its popularity in micro-econometrics by its capacity to produce multiple suboptimal conditional bexpectations of the latent conditional variables of interest under the disguise of an SEM consistent estimator; nevertheless, (iv) such suboptimal conditional expectations give rise to the insurmountable difficulty of credibly interpreting the IV-based parameter estimates, especially in the case of prognosticated omitted variable bias. The findings highlight the methodological drawback of the estimator-centric strategy of textbook econometrics.

Keywords: Instrumental variables; simultaneity; omitted variable bias; collinearity (search for similar items in EconPapers)
JEL-codes: B23 C13 C18 C50 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-09
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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