class7-642-08

Class7-642-08 - Econ 642 Monday April 14 class 7 Econ 642 Monday April 14 class 7 Robert de Jong 1 1 Department of Economics Ohio State University

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Unformatted text preview: Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Robert de Jong 1 1 Department of Economics Ohio State University Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 Outline 1 Econ 642, Monday April 14, class 7 Chapter 15 Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 Chapter 15: Instrumental variables estimation and two stage least squares Plan: go over Wednesday’s material again + extend Scope for these techniques is twofold: 1 endogenous explanatory variable: e.g., explain poverty level from corruption level 2 omitted variable: e.g., explain unemployment claims from enterprise zone presence Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 Omitted variables: options: 1 ignore the problem, accept biased estimators 2 find a proxy for the unobserved variable 3 use fixed effect or first differencing method if the variable does not change over time 4 leave omitted variable in error term, but adjust estimation technique Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 Instrumental variables and two stage least squares are examples of strategy 4 We need extra piece of information: instrumental variables Example: log ( wage ) = β + β 1 educ + β 2 abil + e and assume abil unobserved Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 We need an instrumental variable for educ What are requirements for an instrumental variable z ? y = β + β 1 x + u endogeneity of x : cov ( u , x ) negationslash = Requirements for instrument: 1 cov ( u , z ) = 2 cov ( z , x ) negationslash = Robert de Jong Econ 642, Monday April 14, class 7 Econ 642, Monday April 14, class 7 Chapter 15 cov ( u , z ) = 0: the instrument is exogenous cov ( z , x ) negationslash = 0: rules out completely unrelated instruments Example: for estimating log ( wage ) = β + β 1 educ + e we could consider motheduc- years of education of the mom...
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This note was uploaded on 07/17/2008 for the course ECON 642 taught by Professor De jong during the Spring '08 term at Ohio State.

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Class7-642-08 - Econ 642 Monday April 14 class 7 Econ 642 Monday April 14 class 7 Robert de Jong 1 1 Department of Economics Ohio State University

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