Using instrumental variables techniques in economics and finance
Christopher F Baum
I will discuss the usefulness of instrumental variables (IV) techniques in addressing research questions in economics and finance. IV methods provide workable solutions to problems of endogeneity, measurement error and proxy variables, but they are easily misused. I will present a wide array of diagnostic techniques that should be employed to validate the use of IV in a particular context. I will also discuss the advantages of employing the Generalized Method of Moments form of IV (IV-GMM) and the Continuously Updated Estimator (GMM-CUE), and I will display some newly developed code that efficiently employs Stata's Mata programming language to implement the GMM-CUE.
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