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  • Lewbel Instrumental variable

    Hi, I ran:

    ivreg2 lnGDPper lag1_lnGDPper lag2_lnGDPper lag3_lnGDPper lag4_lnGDPper lnGDP_trans (high_frac_dem = distcr cen_lat), robust cluster (country)

    The final output says, "Instrumented: high_frac_dem, Included instruments: lag1_lnGDPper lag2_lnGDPper lag3_lnGDPper lag4_lnGDPper lnGDP_trans, Excluded instruments: distcr cen_lat

    The instruments I've used here are only distcr and cen_lat. The other variables which stata says included instruments are my control variables. can someone please tell me why it calls the control variables as included instruments? I'm quite concerned if I'm getting the right estimates as expected. are the controls used as instruments here?

    Thanks in advance



  • #2
    The message is expected because the control variables act as their own instruments. In particular, all exogenous variables appear in the first stages for distcr cen_lat. You can see this using the "first" option.

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    • #3
      Oh got it! Thank you so much for the clarification and the wonderful book you've written for us, Jeff!

      Comment


      • #4
        Hi again! I have a panel data of 177 countries from 1960 to 2010. I ran the following code:

        qui ivreg2 lnGDPper lag1_lnGDPper lag2_lnGDPper lag3_lnGDPper lag4_lnGDPper lnGDP_trans (low_frac_dem high_frac_dem = frac_iv1 frac_iv2 frac_iv3 frac_iv4) i.country i.year, robust cluster(country)

        This code works perfectly and gives me significant results as long as I don't include the country and the year fixed effects. When I do include them, I get insignificant results with the following warning:

        Click image for larger version

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        I tried the partial option as well. I'm quite concerned about the reliability of my IV estimates and how helpful the reported standard errors are.

        Thank you!
        Last edited by Abhinaya Kanakasabai; 12 Aug 2023, 18:48.

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        • #5
          This might help:
          Code:
          ivreghdfe

          Comment


          • #6
            From ssc install
            Code:
            ssc install ivreghdfe
            Last edited by Maxence Morlet; 13 Aug 2023, 08:44.

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            • #7
              You definitely don't want to even see the cluster-robust standard errors/t statistics for the country fixed effects. They're meaningless. The others should be fine. To make sure, take Maxence's advince. Or use xtivregress after xtset country year and use the FE option. You include i.year as you did above. With T = 50 and N = 177, there is an issue of how reliable clustering will be. You might also want to think about the decision to include lags of your y variable.

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              • #8
                ivreghdfe will handle your problem with ease..

                Including the lags of the DV can be problem because they too are endogenous. You'll need the Arellano-Bover/Blundell-Bond type estimator (xtdpdsys).

                I'd keep it simple at first.

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                • #9
                  With large T, the bias from including lags may be quite small. The lags are predetermined -- not contemporaneously endogenous. Under restrictions on the time dependence, the bias is on the order of 1/T. Still, I'm not sure I would start by including lags.

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                  • #10
                    Thank you so much, Maxence, Jeff, and George! I removed robust & cluster and replaced ivreg2 with ivreghdfe. The warning disappeared now. However, when I tried xtivreg, I'm getting the following error:

                    "independent variables are collinear with the panel variable country"

                    Thanks again!
                    Last edited by Abhinaya Kanakasabai; 13 Aug 2023, 14:02.

                    Comment


                    • #11
                      Originally posted by Abhinaya Kanakasabai View Post
                      Thank you so much, Maxence, Jeff, and George! I removed robust & cluster and replaced ivreg2 with ivreghdfe. The warning disappeared now. However, when I tried xtivreg, I'm getting the following error:

                      "independent variables are collinear with the panel variable country"

                      Thanks again!
                      Do these specific variables vary within each country, over time?

                      If not, do you have coarser panel indicators, such as continent or larger region? e.g. Western Europe, North America, etc.?

                      Comment


                      • #12
                        Maxence Morlet Thank you for your reply! Yes, these values do change across countries and years. I also have panel indicators - region

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                        • #13
                          Maxence Morlet Sincere apologies, I missed the thread. Thank you for your reply! Yes, these values do change across countries and years. I also have panel indicators - region

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                          • #14
                            In this case, this Papke and Wooldridge (2022) paper may be of interest to you. It has really helped me in my research, and it is perhaps applicable in this case to determine whether you need country fixed effects, or whether region fixed effects are sufficient (countries must be perfectly nested within regions if I'm not wrong): https://link.springer.com/article/10...81-022-02337-y.

                            Comment


                            • #15
                              Maxence Morlet thank you so much for this! It is really helpful!

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