The Reduced Form: A Simple Approach to Inference with Weak Instruments

36 Pages Posted: 17 Oct 2006  

Victor Chernozhukov

Massachusetts Institute of Technology (MIT) - Department of Economics; New Economic School

Christian Hansen

University of Chicago - Booth School of Business - Econometrics and Statistics

Date Written: January 20, 2005

Abstract

In this paper, we consider simple methods for performing robust inference in linear instrumental variables models with weak instruments. We focus on inference based on the reduced form and show that conventional inference procedures about the relevance of the instruments excluded from the structural equation lead to tests of the structural parameters which are valid even if the instruments are weakly correlated to the endogenous variables. The use of standard heteroskedasticity and autocorrelation consistent covariance matrix estimators in constructing these tests also results in inference which is robust to heteroskedasticity, autocorrelation, and weak instruments. We provide a simulation experiment that demonstrates that the procedures have the correct size and good power in many relevant situations and conclude with an empirical example.

Suggested Citation

Chernozhukov, Victor and Hansen, Christian, The Reduced Form: A Simple Approach to Inference with Weak Instruments (January 20, 2005). Available at SSRN: https://ssrn.com/abstract=937943 or http://dx.doi.org/10.2139/ssrn.937943

Victor Chernozhukov

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Room E52-262f
Cambridge, MA 02142
United States
617-253-4767 (Phone)
617-253-1330 (Fax)

HOME PAGE: http://www.mit.edu/~vchern/

New Economic School

47 Nakhimovsky Prospekt
Moscow, 117418
Russia

Christian Hansen (Contact Author)

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-1702 (Phone)

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