DP7726 | Factor-GMM Estimation with Large Sets of Possibly Weak Instruments

Publication Date

07/03/2010

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

Abstract

This paper analyses the use of factor analysis for instrumental variable estimation when the number of instruments tends to infinity. In particular, we focus on situations where many weak instruments exist and/or the factor structure is weak. Theoretical results, simulation experiments and empirical applications highlight the relevance of Factor-GMM estimation, which is also easily implemented.