Exploring the Use of a Nonparametrically Generated Instrumental Variable in the Estimation of a Linear Parametric Equation

The use of a nonparametrically generated instrumental variable in estimating a single-equation linear parametric model is explored, using kernel and other smoothing functions. The method, termed IVOS (Instrumental Variables Obtained by Smoothing), is applied in the estimation of measurement error and endogenous regressor models. Asymptotic and small-sample properties are investigated by simulation, using artificial data sets. IVOS is easy to apply and the simulation results exhibit good statistical properties. It can be used in situations in which standard IV cannot because suitable instruments are not available.