Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

IV Estimation in the Presence of Serially Correlated Regressors and Disturbance Terms

Vol.20, No.3, September , 56–70



  •   (Department of Economics, Korea University and Department of Economics, University of Washington)

  •   (Department of Economics, Ajou University)

  •   (Kenan-Flagler Business School, University of North Carolina)

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Abstract  

We present a unified framework to solve the endogeneity problem in time-series regression models with serially a correlated disturbance term with ARMA($p$,$q$) dynamics. Our focus is on the case in which lagged regressors are used as instrumental variables. The control function approach provides us with the solution to the problem. Besides, it provides us with an easy method for testing for endogeneity. Our Monte Carlo experiments confirm that the proposed two-step estimation procedure and the proposed test of endogeneity perform well for a sample size as small as 250.


Keywords
   Endogeneity, IV Estimation, Autoregressive Disturbance term, Alternative Two-Step Procedure, Generated Regressors

JEL classification codes
   C13, C32
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