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

Author(s): George Kapetanios, Massimiliano Marcellino
Publication Date: March 2010
Keyword(s): DSGE models, Factor models, GMM, Instrumental variables, Principal components, weak instruments
JEL(s): C32, C51, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7726

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.