A New Paradigm: A Joint Test of Structural and Correlation Parameters in Instrumental Variables Regression When Perfect Exogeneity is Violated
Mehmet Caner and
Melinda Morrill
MPRA Paper from University Library of Munich, Germany
Abstract:
Currently, the commonly employed instrumental variables strategy relies on the knife-edge assumption of perfect exogeneity for valid inference. To make reliable inferences on the structural parameters under violations of exogeneity one must know the true correlation between the structural error and the instruments. The main innovation in this paper is to identify an appropriate test in this context: a joint null hypothesis of the structural parameters with the correlation between the instruments and the structural error term. We introduce a new endogeneity accounted test by combining the structural parameter inference while correcting the bias associated with non-exogeneity of the instrument. To address inference under violations of exogeneity, significant contributions have been made in the recent literature by assuming some degree of non-exogeneity. A key advantage of our approach over that of the previous literature is that we do not need to make any assumptions about the degree of violation of exogeneity either as possible values or prior distributions. In particular, our method is not a form of sensitivity analysis. Since our test statistic is continuous and monotonic in correlation, one can conduct inference for the structural parameters by a simple grid search over correlation values. We can make accurate inferences on the structural parameters because of a feature of the grid search over correlation values. One can also build joint confidence intervals for the structural parameters and the correlation parameter by inverting the test statistic. In the inversion, the null values of these parameters are used. We also propose a new way of testing exclusion restrictions, even in the just identified case.
Keywords: identification; imperfect instruments (search for similar items in EconPapers)
JEL-codes: C01 C12 C13 (search for similar items in EconPapers)
Date: 2009-10-06
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/17689/1/MPRA_paper_17689.pdf original version (application/pdf)
Related works:
Working Paper: A New Paradigm: A Joint Test of Structural and Correlation Parameters in Instrumental Variables Regression When Perfect Exogeneity is Violated (2009) 
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:pra:mprapa:17689
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().