Re: st: 2SLS and Instrumental Variables

["Dana Shills" <shills52@hotmail.com>]

> > > > > Dana,
> > > > > I'm not sure what your question means.
To return to your previous example, why not use ivreg2 as follows:
ivreg2 Y1 X1 X2 (Y2=Z1-Z4), first

> > I realize that I can use ivreg2 but I am just trying to understand the 
> > process of 2SLS and IV better. So in a regression of
regress Y1 X1 X2 Z1-Z4 Y2res
How do I reconcile the two arguments below--
(a) Z1-Z4 should come out to be significant since if we substitute Z1-Z4 by 
Y2hat, Y2hat comes in significant VERSUS
(b) According to the theory behind IV, there should be no direct causal 
impact of the instruments on Y1. So Z1-Z4 cannot explain Y1 and hence should 
not be significant. Is this statement wrong?

Also according to (a) multicollinearity would explain why Z1-Z4 may not come 
out significant individually but they are jointly significant. Im wondering 
why multicollinearity shows up when we regress Y1 on Z1-Z4 and not when we 
regress Y2 on Z1-Z4.

Thanks

Dana

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