Parsimonious Estimation with Many Instruments

19 Pages Posted: 3 Sep 2009

See all articles by Jan J. Groen

Jan J. Groen

Federal Reserve Bank of New York

George Kapetanios

King's College, London

Date Written: August 2009

Abstract

We suggest a way to perform parsimonious instrumental variables estimation in the presence of many, and potentially weak, instruments. In contrast to standard methods, our approach yields consistent estimates when the set of instrumental variables complies with a factor structure. In this sense, our method is equivalent to instrumental variables estimation that is based on principal components. However, even if the factor structure is weak or nonexistent, our method, unlike the principal components approach, still yields consistent estimates. Indeed, simulations indicate that our approach always dominates standard instrumental variables estimation, regardless of whether the factor relationship underlying the set of instruments is strong, weak, or absent.

Keywords: instrumental variable estimation, many instruments, factor models

JEL Classification: C30, C59, C13

Suggested Citation

Groen, Jan J. and Kapetanios, George, Parsimonious Estimation with Many Instruments (August 2009). FRB of New York Staff Report No. 386, Available at SSRN: https://ssrn.com/abstract=1465727 or http://dx.doi.org/10.2139/ssrn.1465727

Jan J. Groen (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/groen/

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

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