Econometrics Assignment Example | Topics and Well Written Essays - 1000 words - 2

Econometrics - Assignment Example The least squares estimator bMC is not consistent in this case since there exists autocorrelation between the independent variable and the error term ui i.e. i.e. the disturbances are pairwise correlated. This is referred to as autocorrelated disturbances. b) You have data on the variables Y , X, W and Z. The variable Z satisfies the "exogeneity" condition and the "relevance" condition . You decide to estimate model (3) using the instrumental variables method. Is the instrumental variables estimator bIV consistent in this case? Explain your answer. The instrumental variable estimator bIV is consistent in this case since the instrumental variable is uncorrelated with the error term though there exists a correlation between it with the exogenous variable. c) You have data on the variables Y, X and Z, but you dont have data on W. The variable Z satisfies the "exogeneity" condition and the "relevance" condition . You decide to omit the variable W from the regression and to estimate the model: using the instrumental variables method. The instrumental variable estimator bIV is inconsistent in this case; for the consistency in the instrumental variables Zi and Wi should be correlated. In this given case, the conditions for consistency have not been met hence leading the instrumental variables estimator bIV to be inconsistent. i) What is the interpretation of this value of the J statistic? Do we reject the hypothesis of exogeneity of the variables Z1 and Z2? (you will need to look at the critical values in the table for the distribution of to answer this question). The interpretation for the J statistic is that that all instruments are uncorrelated with ui. With the value of J statistics being 15.7, we reject the null hypothesis and conclude either one or more of the instruments are invalid or that the structural model is specified incorrectly The p-value of the coefficient of incomehi is less than 5% significance level (p-value=0.000