Synthetic Instrumental Variables

58 Pages Posted: 8 May 2019 Last revised: 12 Oct 2021

See all articles by Ratbek Dzhumashev

Ratbek Dzhumashev

Monash University - Department of Economics

Ainura Tursunalieva

Swinburne University

Date Written: August 28, 2021

Abstract

This paper presents a new method for synthesizing instrumental variables using only the dependent and endogenous explanatory variables of the regression model. We show that a valid instruments can be spanned using the dependent and endogenous variables. Then based on this rationale, we construct an estimator that uses moment conditions stemming from the validity of such synthetic instruments. We demonstrate the consistency of the newly-developed estimator using synthetic variables. A computational algorithm is developed using the moments conditions stemming from the consistency of the estimator. One can use this synthetic instrumental variables method as an alternative to traditional external instruments methods.

Keywords: IV, OLS, Estimator

JEL Classification: C13,C18

Suggested Citation

Dzhumashev, Ratbek and Tursunalieva, Ainura, Synthetic Instrumental Variables (August 28, 2021). Available at SSRN: https://ssrn.com/abstract=3370143 or http://dx.doi.org/10.2139/ssrn.3370143

Ratbek Dzhumashev (Contact Author)

Monash University - Department of Economics ( email )

Wellington Road
Clayton, Victoria 3
Australia

Ainura Tursunalieva

Swinburne University ( email )

450 Burwood Rd
Hawthorn, Springvale 3122
Australia

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