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Valid Confidence Intervals and Inference in the Presence of Weak Instruments

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  • Zivot, E
  • Startz, R
  • Nelson, C-R

Abstract

We investigate confidence intervals and inference for the instrumental variables model with weak instruments. Wald-based confidence intervals for a structural parameter perform poorly in that the probability they reject the null is far greater than their nominal size. We show that the preactice of "pre-testing" by looking at the significance of the fist-stage regression and then making inference based on the Wald statistic leads to extremely poor results when the instruments are very weak.

Suggested Citation

  • Zivot, E & Startz, R & Nelson, C-R, 1997. "Valid Confidence Intervals and Inference in the Presence of Weak Instruments," Working Papers 97-17, University of Washington, Department of Economics.
    • Handle: RePEc:udb:wpaper:97-17
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    1. Dufour, J.M., 1995. "Some Impossibility Theorems in Econometrics with Applications to Instrumental Variables, Dynamic Models and Cointegration," Cahiers de recherche 9539, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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    Keywords

    STATISTICS;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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