A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments

Stock, James H.; Wright, Jonathan H.; Yogo, Motohiro

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A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments

Journal of Business and Economic Statistics, Vol. 20, No. 4, 2002

52 Pages Posted: 9 Jan 2011

See all articles by James H. Stock

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Motohiro Yogo

Princeton University - Department of Economics; National Bureau of Economic Research

Date Written: June 27, 2002

Abstract

Weak instruments arise when the instruments in linear instrumental variables (IV) regression are weakly correlated with the included endogenous variables. In generalized method of moments (GMM), more generally, weak instruments correspond to weak identification of some or all of the unknown parameters. Weak identification leads to GMM statistics with nonnormal distributions, even in large samples, so that conventional IV or GMM inferences are misleading. Fortunately, various procedures are now available for detecting and handling weak instruments in the linear IV model and, to a lesser degree, in nonlinear GMM.

Keywords: Instrument relevance, Instrumental variables, Similar tests

Suggested Citation: Suggested Citation

Stock, James H. and Wright, Jonathan H. and Yogo, Motohiro, A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments (June 27, 2002). Journal of Business and Economic Statistics, Vol. 20, No. 4, 2002, Available at SSRN: https://ssrn.com/abstract=1734926