Non-linearity Induced Weak Instrumentation

Ioannis Kasparis, Peter Phillips and Tassos Magdalinos

University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics

Abstract: In regressions involving integrable functions we examine the limit properties of IV estimators that utilise integrable transformations of lagged regressors as instruments. The regressors can be either I(0) or I(1) processes. We show that this kind of nonlinearity in the regression function can significantly affect the relevance of the instruments. In particular, such instruments become weak when the signal of the regressor is strong, as it is in the I(1) case. Instruments based on integrable functions of lagged I(1) regressors display long range dependence and so remain relevant even at long lags, continuing to contribute to variance reduction in IV estimation. However, simulations show that OLS is generally superior to IV estimation in terms of MSE, even in the presence of endogeneity. Estimation precision is also reduced when the regressor is nonstationary.

Keywords: Instrumental variables; Integrable function; Integrated process; Invariance principle; Local time; Mixed normality; Stationarity; Nonlinear cointegration; Unit roots; Weak Instruments. (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012-01
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.econ.ucy.ac.cy/RePEc/papers/02-12.pdf (application/pdf)

Related works:
Journal Article: Nonlinearity Induced Weak Instrumentation (2014)
Working Paper: Non-linearity Induced Weak Instrumentation (2012)
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:ucy:cypeua:02-2012

Access Statistics for this paper

More papers in University of Cyprus Working Papers in Economics from University of Cyprus Department of Economics
Bibliographic data for series maintained by ().