Consider the following simple regression model y = ₀ + ₁x₁ + u. The variable z is a poor instrument for x if _____. A)there is a high correlation between z and x B)there is a low correlation between z and x C)there is a high correlation between z and u D)there is a low correlation between z and u

Question

Quizplus · Accepted Answer

A good instrument should have a strong correlation with the endogenous variable (x) and a weak correlation with the error term (u). Therefore, a poor instrument is one that has a low correlation with the endogenous variable (x).

Consider the Following Simple Regression Model Y = 0

Consider the Following Simple Regression Model Y = ₀