The Distribution of the Instrumental Variables Estimator and Its t-RatioWhen the Instrument is a Poor One

Charles Nelson and Richard Startz

No 69, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: When the instrumental variable is a poor one, in the sense of being weakly correlated with the variable it proxies, the small sample distribution of the IV estimator is concentrated around a value that is inversely related to the feedback in the system and which is often further from the true value than is the plim of OLS. The sample variance of residuals similarly becomes concentrated around a value which reflects feedback and not the variance of the disturbance. The distribution of the t-ratio reflects both of these effects, stronger feedback producing larger t-ratios. Thus, in situations where OLS is badly biased, a poor instrument will lead to spurious inferences under IV estimation with high probability, and generally perform worse than OLS.

Date: 1988-09
Note: ME
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Citations: View citations in EconPapers (4)

Published as Econometrica, April 1990.

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Related works:
Journal Article: The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument Is a Poor One (1990)
Working Paper: THE DISTRIBUTION OF THE INSTRUMENTAL VARIABLES ESTIMATOR AND ITS T-RATIO WHEN THE INSTRUMENT IS A POOR ONE (1988)
Working Paper: THE DISTRIBUTION OF THE INSTRUMENTAL VARIABLES ESTIMATOR AND ITS T-RATIO WHEN THE INSTRUMENT IS A POOR ONE (1988)
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