Let the Data Speak? On the Importance of Theory-Based Instrumental Variable Estimations

Volker Grossmann and Osikominu Aderonke
Additional contact information
Osikominu Aderonke: University of Hohenheim,Stuttgart, Germany

German Economic Review, 2019, vol. 20, issue 4, e831-e851

Abstract: In absence of randomized-controlled experiments, identification is often aimed via instrumental variable (IV) strategies, typically two-stage least squares estimations. According to Bayes’ rule, however, under a low ex ante probability that a hypothesis is true (e.g. that an excluded instrument is partially correlated with an endogenous regressor), the interpretation of the estimation results may be fundamentally flawed. This paper argues that rigorous theoretical reasoning is key to design credible identification strategies, the foremost, finding candidates for valid instruments. We discuss prominent IV analyses from the macro-development literature to illustrate the potential benefit of structurally derived IV approaches.

Keywords: Bayes’ Rule; economic development; identification; instrumental variable estimation; macroeconomic theory (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/geer.12192 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Journal Article: Let the Data Speak? On the Importance of Theory‐Based Instrumental Variable Estimations (2019)
Working Paper: Let the Data Speak? On the Importance of Theory-Based Instrumental Variable Estimations (2019)
Working Paper: Let the Data Speak? On the Importance of Theory-Based Instrumental Variable Estimations (2019)
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:bpj:germec:v:20:y:2019:i:4:p:e831-e851

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/ger/html

DOI: 10.1111/geer.12192

Access Statistics for this article

German Economic Review is currently edited by Peter Egger, Almut Balleer, Jesus Crespo-Cuaresma, Mario Larch, Aderonke Osikominu and Georg Wamser

More articles in German Economic Review from De Gruyter
Bibliographic data for series maintained by Peter Golla ().