Instrumental Variables Regression with Independent Observations

Abstract

INTRODUCTION THE METHOD OF INSTRUMENTAL VARIABLES (IV), proposed independently by Reiersol [15] and Geary [4], is one of the most useful classes of estimation techniques available to econometricians. The method is particularly useful in the context of errors-in-variables and simultaneous equation problems, and it ineludes ordinary least squares (OLS), two-stage least squares (2SLS) (Klein [9]), three-stage least squares (3SLS) (Madansky [12]) and certain full-information maximum likelihood estimators (Hausman [7]) as special cases. To date, the definitive theoretical treatment of the instrumental variables method is that of Sargan [16]. Important contributions have also been made by Brundy and Jorgenson [!, 2]. However, this work has not established the properties of IV estimators for all of the kinds of data analyzed by economists. Sargan's work is appropriate for data which are stochastic processes of the kind considered by Koopmans, Rubin, and Leipnik {10] in their study of dynami