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Factor-GMM Estimation with Large Sets of Possibly Weak Instruments

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  • Marcellino, Massimiliano
  • Kapetanios, George

Abstract

This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. In particular, we focus on situations where many weak instruments exist and/or the factor structure is weak. Theoretical results, simulation experiments and empirical applications highlight the relevance of Factor-GMM estimation, which is also easily implemented.

Suggested Citation

  • Marcellino, Massimiliano & Kapetanios, George, 2010. "Factor-GMM Estimation with Large Sets of Possibly Weak Instruments," CEPR Discussion Papers 7726, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7726
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    More about this item

    Keywords

    Factor models; Gmm; Instrumental variables; Principal components; Weak instruments; Dsge models;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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