Factor-GMM Estimation with Large Sets of Possibly Weak Instruments

39 Pages Posted: 17 Mar 2010

See all articles by George Kapetanios

George Kapetanios

King's College, London

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 2010

Abstract

This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. In particular, we focus on situations where many weak instruments exist and/or the factor structure is weak. Theoretical results, simulation experiments and empirical applications highlight the relevance of Factor-GMM estimation, which is also easily implemented.

Keywords: DSGE models, Factor models, GMM, Instrumental variables, Principal components, weak instruments

JEL Classification: C32, C51, E52

Suggested Citation

Kapetanios, George and Marcellino, Massimiliano, Factor-GMM Estimation with Large Sets of Possibly Weak Instruments (March 2010). CEPR Discussion Paper No. DP7726, Available at SSRN: https://ssrn.com/abstract=1573430

George Kapetanios (Contact Author)

King's College, London ( email )

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

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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