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A Note on the Theme of Too Many Instruments *
Author(s) -
Roodman David
Publication year - 2009
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2008.00542.x
Subject(s) - endogeneity , generalized method of moments , popularity , estimator , econometrics , suspect , instrumental variable , economics , theme (computing) , simple (philosophy) , estimation , computer science , statistics , mathematics , management , political science , panel data , law , philosophy , epistemology , operating system
The difference and system generalized method of moments (GMM) estimators are growing in popularity. As implemented in popular software, the estimators easily generate instruments that are numerous and, in system GMM, potentially suspect. A large instrument collection overfits endogenous variables even as it weakens the Hansen test of the instruments’ joint validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating Forbes [ American Economic Review (2000) Vol. 90, pp. 869–887] on income inequality and Levine et al. [ Journal of Monetary Economics ] (2000) Vol. 46, pp. 31–77] on financial sector development. Results in both papers appear driven by previously undetected endogeneity.