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

Author(s): George Kapetanios , Massimiliano Marcellino

Publication Date: March 2010

Keyword(s): Factor models , GMM , Instrumental variables , Principal components , weak instruments , DSGE models

JEL(s): C32 , C51 , E52

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7726.asp

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.