I would like to do a preselection of possible instruments within a
VAR. The two endogenous variables variables π(t+1) and s(t) are
regressed on all potential instruments. This specification can be
formalized as:
π(t+1)=v1+A11*π(t-1)+A12*π(t-2)+...+A1j*π(t-j)+B11*x(t-1)+B12*x(t-2)+...+B1j*x(t-j)
s(t)=v2+A21*s(t-1)+A22*s(t-2)+...+A2j*π(t-j)+B21*x(t-1)+B22*x(t-2)+...+B2j*x(t-j)
with v1,v2 a a deterministic term, and x(t−j) the vector of all other
predetermined variables with lag j. The maximal lag length is L1 = 10
and L2 = 5.
Can I apply a model reduction procedure that works through a
sequential elimination of regressors in order to obtain a model that
lead
to the smallest value of the particular information criterion as
Lutkepohl, H. (2005). New introduction to multiple time series
analysis, Springer?
Thanks in advance,
Sebastian.
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