Using Invalid Instruments on Purpose: Focused Moment Selection and Averaging for GMM, Second Version

Francis DiTraglia

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: In finite samples, the use of a slightly endogenous but highly relevant instrument can reduce mean-squared error (MSE). Building on this observation, I propose a moment selection criterion for GMM in which moment conditions are chosen based on the MSE of their associated estimators rather than their validity: the focused moment selection criterion (FMSC). I then show how the framework used to derive the FMSC can address the problem of inference post-moment selection. Treating post-selection estimators as a special case of moment-averaging, in which estimators based on different moment sets are given data-dependent weights, I propose a simulation-based procedure to construct valid confidence intervals for a variety of formal and informal moment-selection and averaging procedures. Both the FMSC and confidence interval procedure perform well in simulations. I conclude with an empirical example examining the effect of instrument selection on the estimated relationship between malaria transmission and income.

Keywords: Moment selection; GMM estimation; Model averaging; Focused Information Criterion; Post-selection estimators (search for similar items in EconPapers)
JEL-codes: C21 C26 C52 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2011-11-09, Revised 2014-12-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://economics.sas.upenn.edu/sites/default/files/filevault/14-045.pdf (application/pdf)

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:pen:papers:14-045

Access Statistics for this paper

More papers in PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 133 South 36th Street, Philadelphia, PA 19104. Contact information at EDIRC.
Bibliographic data for series maintained by Administrator ().