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pca2: implementing a strategy to reduce the instrument count in panel GMM

Maria Bontempi () and Irene Mammi ()

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: The problem of instrument proliferation and its consequences (overfitting of the endogenous explanatory variables, biased IV and GMM estimators, weakening of the power of the overidentification tests) are well known. This paper introduces a statistical method to reduce the instrument count. The principal component analysis (PCA) is applied on the instrument matrix, and the PCA scores are used as instruments for the panel generalized method-of-moments (GMM) estimation. This strategy is implemented through the new command pca2.

JEL-codes: C13 C15 C33 C36 C63 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-ecm
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