Instrumental Variables regression uses instruments to
A)establish the Mozart Effect.
B)increase the regression R2.
C)eliminate serial correlation.
D)isolate movements in X that are uncorrelated with u.

Question

Quizplus · Accepted Answer

Instrumental Variables regression is used to isolate movements in X that are uncorrelated with u, so that a causal relationship between X and y can be established. This is done by using instruments that are correlated with the endogenous variable X, but not with the error term u. This helps to overcome endogeneity bias and obtain consistent estimates of the effect of X on y. The other options listed are not relevant to the use of instrumental variables regression.

Instrumental Variables Regression Uses Instruments to