Shrinkage priors for linear instrumental variable models with many instruments

P. Richard Hahn and Hedibert Lopes

No 207, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

Abstract: This paper addresses the weak instruments problem in linear instrumental variable models from a Bayesian perspective. The new approach has two components. First, a novel predictor-dependent shrinkage prior is developed for the many instruments setting. The prior is constructed based on a factor model decomposition of the matrix of observed instruments, allowing many instruments to be incorporated into the analysis in a robust way. Second, the new prior is implemented via an importance sampling scheme, which utilizes posterior Monte Carlo samples from a first-stage Bayesian regression analysis. This modular computation makes sensitivity analyses straightforward. Two simulation studies are provided to demonstrate the advantages of the new method. As an empirical illustration, the new method is used to estimate a key parameter in macro-economic models: the elasticity of inter-temporal substitution. The empirical analysis produces substantive conclusions in line with previous studies, but certain inconsistencies ofearlier analyses are resolved.

Pages: 28 pages
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repositorio.insper.edu.br/handle/11224/5945 Full text (text/html)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

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:aap:wpaper:207

Ordering information: This working paper can be ordered from
https://repositorio. ... br/handle/11224/5945

Access Statistics for this paper

More papers in Business and Economics Working Papers from Unidade de Negocios e Economia, Insper Contact information at EDIRC.
Bibliographic data for series maintained by Biblioteca Telles ().