2 Stage Least Squares: A Thorough Guide to Two-Stage Least Squares Estimation in Modern Econometrics
In empirical research, researchers often confront a stubborn problem: endogeneity. When a regressor is correlated with the error term, ordinary least squares (OLS) yields biased and inconsistent estimates. The remedy, in many cases, lies in using instrumental variables (IV) to isolate the part of the endogenous regressor that is uncorrelated with the disturbance. The workhorse…
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