lecture15a

Lecture15a - ECON 103 Lecture 15A Instrumental Variables I Maria Casanova May 26th(version 0 Maria Casanova Lecture 15A Requirements for this

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Unformatted text preview: ECON 103, Lecture 15A: Instrumental Variables I Maria Casanova May 26th (version 0) Maria Casanova Lecture 15A Requirements for this lecture: Chapter 12 of Stock and Watson Maria Casanova Lecture 15A 0. Introduction In lecture 12 we covered 5 threats to internal validity of linear regression model. The 5 threats to internal validity arose because the error term was correlated with the regressor, which caused OLS estimator of unknown population coefficients to be biased. 2 of those threats to validity are: Omitted variable bias Simultaneous causality bias Instrumental variables (IV) regression can be used to obtain a consistent estimator of the unknown coefficients in the presence of omitted variable bias or simultaneous causality bias. Maria Casanova Lecture 15A 0. Introduction How does IV work? - Intuition Consider the following model: Y = β + β 1 X + ε Think of the variation in X as having two sources: One part that is correlated with the error term One part that is not correlated with it IV uses one or more additional variables Z called instrumental variables or instruments to isolate the variation in X that is not correlated with ε . In this way the source of bias is avoided so that consistent estimates of β 1 can be obtained. Maria Casanova Lecture 15A 0. Introduction Example 1: omitted variable bias Consider the following model for the average test score in class j : Av test score j = β + β 1 Size j + ε Income would be an omitted variable in this model if: Income had an effect of average test scores AND Income was correlated with class size.Income was correlated with class size....
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This note was uploaded on 02/04/2010 for the course ECON 103 taught by Professor Sandrablack during the Spring '07 term at UCLA.

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Lecture15a - ECON 103 Lecture 15A Instrumental Variables I Maria Casanova May 26th(version 0 Maria Casanova Lecture 15A Requirements for this

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