Trend instrumental variable regression with an application to the US New Keynesian Phillips Curve

Zhihong Chen and Huizhu Xia

Economic Modelling, 2020, vol. 93, issue C, 595-604

Abstract: When a linear model suffers from endogeneity, a conventional solution is to use external instrumental variables. Sometimes, however, there are either no suitable external IVs or they are of poor quality. This paper constructs an internal instrumental variable from the time trend in the endogenous regressor without using any external IVs. We show that under some mild conditions this new trend IV estimator has desirable asymptotic properties, and also provide a robust Durbin-Wu-Hausman specification test to demonstrate the necessity of the IV method. Monte Carlo simulations show that the estimator and the test have good finite sample performance. In the end, we apply the trend IV estimator to the US New Keynesian Phillips Curve and find that it works as well as the usual external IVs in the literature.

Keywords: Durbin-Wu-Hausman test; Endogeneity; Instrumental variable; Local linear regression; Local trends; New keynesian phillips curve (search for similar items in EconPapers)
JEL-codes: C13 C14 C22 C26 E31 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:93:y:2020:i:c:p:595-604

DOI: 10.1016/j.econmod.2020.09.003

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