On Mar 31, 2004, at 2:33 AM, Giorgio wrote:
is it correct? how does it work? Are you sure that I've been
instrumenting GDP with L.GDP and POP with L.POP?
As has been oft mentioned on this list, this is not how instrumental
variables works. You estimate y=Xb+e with a set of instruments Z. Some
of the elements in Z are likely also in X (at least a units vector in
most cases). There is no meaningful concept of 'this is an instrument
for that'--the only things that matter are the order condition (which
is a relation on the number of columns of Z vs. X) and the rank
condition (that states that these columns of Z are not linearly
dependent). In the example you give
xtivreg trade rer (gdp pop = L.gdp L.pop),fe
the equation is exactly ID, in that you have just enough instruments to
identify the RHS two endogenous variables. Do you really believe that
over the timespan of your data that the country's population is
determined by trade? I can imagine a long-run relation where pop.growth
is related to openness or lack thereof (consider all those starving
North Koreans) but it is a bit implausible to consider that trade(i,t)
determines pop(i.t). For one thing, there is a nine month lag involved,
so if you haven't conceived by tonight, your child will not be
appearing in the 2004 census.
Kit
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