Lanne, Markku and Saikkonen, Pentti (2009): GMM Estimation with Noncausal Instruments.
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Lagged variables are often used as instruments when the generalized method of moments (GMM) is applied to time series data. We show that if these variables follow noncausal autoregressive processes, their lags are not valid instruments and the GMM estimator is inconsistent. Moreover, in this case, endogeneity of the instruments may not be revealed by the J-test of overidentifying restrictions that may be inconsistent and, as shown by simulations, its finite-sample power is, in general, low. Although our explicit results pertain to a simple linear regression, they can be easily generalized. Our empirical results indicate that noncausality is quite common among economic variables, making these problems highly relevant.
|Item Type:||MPRA Paper|
|Original Title:||GMM Estimation with Noncausal Instruments|
|Keywords:||Noncausal autoregression; instrumental variables; test of overidentifying restrictions|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation
C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C12 - Hypothesis Testing: General
C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes
|Depositing User:||Markku Lanne|
|Date Deposited:||06. Jul 2010 17:08|
|Last Modified:||24. May 2015 13:11|
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