This preview shows pages 1–2. Sign up to view the full content.
Econ 360  Fall 2010
[email protected]
Problem Set 10 Answers
(Advanced Topic: Instrumental Variables)
True/False
(24 points)
1.
FALSE
This is not one of the characteristics of a valid instrument. If
x
and
u
are
uncorrelated there is no need for an instrument.
2.
TRUE
Consider the regression model
y
=
β
0
+
β
1
x
+
u
, where
z
is a potential instru
ment for
x
. In order for
z
to be a valid instrument, it must be the case that
z
and
u
are uncorrelated.
3.
FALSE
Consider the regression model
y
=
β
0
+
β
1
x
+
u
, where
z
is a potential
instrument for
x
. In order for
z
to be a valid instrument, it must be the case that
z
and
x
are
correlated (the stronger the correlation the better)
.
4.
FALSE
Consider the regression model
y
=
β
0
+
β
1
x
+
u
, where
z
is an instrument for
x
. If
z
is a valid instrument for
x
we replace
x
with the ﬁtted value
, ˆ
x
, where ˆ
x
is
a function of
z
in the regression model in order to obtain a consistent estimate of
β
1
.
Or, one could use the instrumental variables estimator.
5.
TRUE
Consider the regression model
y
=
β
0
+
β
1
x
+
u
, where
z
is a an instrument
for
x
. The instrumental variables estimator of
β
1
is
ˆ
β
IV
1
=
n
X
i
=1
(
z
i

¯
z
)
y
i
n
X
i
=1
(
z
i

¯
z
) (
x
i

¯
x
)
6.
FALSE
Consider the regression model
y
=
β
0
+
β
1
x
+
u
, where
z
is a an instrument
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 02/06/2012 for the course ECON 360 taught by Professor Na during the Spring '10 term at Purdue University.
 Spring '10
 NA

Click to edit the document details