TY - BOOK ID - 135527681 TI - The Distribution of the Instrumental Variables Estimator and Its t-Ratio When the Instrument is a Poor One AU - Nelson, Charles R. AU - Startz, Richard AU - National Bureau of Economic Research. PY - 1988 PB - Cambridge, Mass. National Bureau of Economic Research DB - UniCat KW - Instrumental variables (Statistics) KW - Economics, Mathematical. UR - https://www.unicat.be/uniCat?func=search&query=sysid:135527681 AB - When the instrumental variable is a poor one, in the sense of being weakly correlated with the variable it proxies, the small sample distribution of the IV estimator is concentrated around a value that is inversely related to the feedback in the system and which is often further from the true value than is the plim of OLS. The sample variance of residuals similarly becomes concentrated around a value which reflects feedback and not the variance of the disturbance. The distribution of the t-ratio reflects both of these effects, stronger feedback producing larger t-ratios. Thus, in situations where OLS is badly biased, a poor instrument will lead to spurious inferences under IV estimation with high probability, and generally perform worse than OLS. ER -