Consider the following macro-economic model, which is a structural model, C = α0 + α1 + u where Ci is aggregate consumpt
Posted: Mon May 02, 2022 8:37 am
Consider the following macro-economic model, which is a
structural model,
C = α0 + α1 + u
where Ci is aggregate consumption in year i,
Yi is GNP, and α1 is the Marginal Propensity
to Consume out of income (the MPC). Suppose that z1 and
z2 are two instruments for Y.
Demonstrate why the OLS estimator of α1 is
inconsistent and why the Instrumental Variable estimator of
α1 is consistent [To make your analysis simple, you may
use one of the two instruments for your demonstration].
structural model,
C = α0 + α1 + u
where Ci is aggregate consumption in year i,
Yi is GNP, and α1 is the Marginal Propensity
to Consume out of income (the MPC). Suppose that z1 and
z2 are two instruments for Y.
Demonstrate why the OLS estimator of α1 is
inconsistent and why the Instrumental Variable estimator of
α1 is consistent [To make your analysis simple, you may
use one of the two instruments for your demonstration].