Publication Type

Journal Article

Version

submittedVersion

Publication Date

1-2016

Abstract

This paper considers stationary regression models with near-collinear regressors. Limit theory is developed for regression estimates and test statistics in cases where the signal matrix is nearly singular in finite samples and is asymptotically degenerate. Examples include models that involve evaporating trends in the regressors that arise in conditions such as growth convergence. Structural equation models are also considered and limit theory is derived for the corresponding instrumental variable (IV) estimator, Wald test statistic, and overidentification test when the regressors are endogenous. It is shown that near-singular designs of the type considered here are not completely fatal to least squares inference, but do inevitably involve size distortion except in special Gaussian cases. In the endogenous case, IV estimation is inconsistent and both the block Wald test and Sargan overidentification test are conservative, biasing these tests in favor of the null.

Keywords

Endogeneity; Instrumental variable; Singular signal matrix; Size distortion; Structural equation

Discipline

Behavioral Economics | Growth and Development

Research Areas

International Economics

Publication

Advances in Econometrics

Volume

36

First Page

461

Last Page

486

ISSN

0731-9053

Identifier

10.1108/S0731-905320160000036022

Publisher

JAI Press

Additional URL

https://doi.org./10.1108/S0731-905320160000036022

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