Bontempi, Maria Elena ; Mammi, Irene
(2014)
pca2: implementing a strategy to reduce the instrument count in panel GMM.
Bologna:
Dipartimento di Scienze economiche DSE,
p. 25.
DOI 10.6092/unibo/amsacta/4071.
In: Quaderni - Working Paper DSE
(960).
ISSN 2282-6483.
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Abstract
The problem of instrument proliferation and its consequences (overfitting of the endogenous explanatory variables, biased IV and GMM estimators, weakening of the power of the overidentification tests) are well known. This paper introduces a statistical method to reduce the instrument count. The principal component analysis (PCA) is applied on the instrument matrix, and the PCA scores are used as instruments for the panel generalized method-of-moments (GMM) estimation. This strategy is implemented through the new command pca2.
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