New study reveals flaws in IV estimator, impacting accuracy of economic predictions.
The article explores how the IV estimator behaves when instruments are weak. By using complex mathematical formulas, the researchers found that the bias and mean square error of the IV estimator can be approximated accurately even with a large number of instruments. They also discovered that the variance component of the mean square error is lower than the bias component when many instruments are used. These findings apply not only in theoretical scenarios but also in real-world situations with fixed instruments and Gaussian errors.