Pca2: Implementing a Strategy to Reduce the Instrument Count in Panel GMM
Quaderni - Working Paper DSE N° 960
25 Pages Posted: 2 Sep 2014
Date Written: August 27, 2014
The problem of instrument proliferation and its consequences (overfitting of the endogenous explanatory variables, biased IV and GMM estimators, weakening of the power of the overidentification tests) are well known. This paper introduces a statistical method to reduce the instrument count. The principal component analysis (PCA) is applied on the instrument matrix, and the PCA scores are used as instruments for the panel generalized method-of-moments (GMM) estimation. This strategy is implemented through the new command pca2.
Keywords: pca2, proliferation of instruments, principal component analysis, panel data, generalized method of moments
JEL Classification: C13, C15, C33, C36, C63
Suggested Citation: Suggested Citation