Year: 2009
Type: article
Abstract: 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.
Author: David Roodman
Institution: Center for Global Development
Language: English
Subfield: Statistics and Probability
Field: Mathematics
Domain: Physical Sciences
Open Access status: bronze
OpenAlex ID: W3126027997