On the Interpretation of Instrumental Variables in the Presence of Specification Errors

Abstract

The method of instrumental variables (IV) and the generalized method of moments (GMM), and their applications to the estimation of errors-in-variables and simultaneous equations models in econometrics, require data on a sufficient number of instrumental variables that are both exogenous and relevant. We argue that, in general, such instruments (weak or strong) cannot exist.

Keywords

• instrumental variables
• generalized method of moments
• random coefficient models