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Full-Text Articles in Economics
Non-Linearity Induced Weak Instrumentation, Ioannis Kasparis, Peter C.B. Phillips, Tassos Magdalinos
Non-Linearity Induced Weak Instrumentation, Ioannis Kasparis, Peter C.B. Phillips, Tassos Magdalinos
Cowles Foundation Discussion Papers
In regressions involving integrable functions we examine the limit properties of IV estimators that utilise integrable transformations of lagged regressors as instruments. The regressors can be either I(0) or nearly integrated (NI) processes. We show that this kind of nonlinearity in the regression function can significantly affect the relevance of the instruments. In particular, such instruments become weak when the signal of the regressor is strong, as it is in the NI case. Instruments based on integrable functions of lagged NI regressors display long range dependence and so remain relevant even at long lags, continuing to contribute to variance reduction …