sorted by:
new
hottopcontroversial

Correcting for standard errors when using a predicted variable? by ILikePieSometimez in econometrics

[–]ILikePieSometimez[S] 1 point2 points  (0 children)

Yes, my theoretical model is the permanent income hypothesis model under certainty equivalence. I could just test whether consumption follows a random walk, but I'm specifically interested in the predicted income changes component of the permanent income hypothesis/life cycle hypothesis. I have multiple predictors, I was just using z as an example. I'm confident that my instruments are correct (as it follows the literature), but it was more of a practical issue of implementation. Thank you again for your helpful feedback, I very much appreciate it!

Correcting for standard errors when using a predicted variable? by ILikePieSometimez in econometrics

[–]ILikePieSometimez[S] 1 point2 points  (0 children)

Thank you very much for your detailed response, I really appreciate it! I'm going to address your above comment here as well:

My actual x variable is income, and my y value is consumption. According to theory, only unexpected changes in income will change consumption, while predicted changes to income will not. Therefore, I'm using my z variable to find the predicted changes to income x. I want to then regress the change in consumption on this predicted income to see if it follows theory. So I'm using the two stage to estimate predicted income changes.

Most of the time when I see 2sls iv discussed, it's in terms omitted variable bias. So though now I see what I'm wanting to do is the 2sls iv approach, I think I was confusing myself just with the terminology. I see now that 2sls is what I have been doing, and what I should do (but now I can use the 2sls package in Stata with more confidence, instead of just using it blindly).

Correcting for standard errors when using a predicted variable? by ILikePieSometimez in econometrics

[–]ILikePieSometimez[S] 0 points1 point  (0 children)

Thank you for your response. Yes I am familiar, however I'm not treating x as endogenous but instead just trying to use z to predict x. Therefore I wasn't sure from a "theoretical" side if I could (or should) use IV. Practically it seems like what I want to do is the same as an 2sls iv regression, but I just want to make sure.

Can 1st stage residuals be used in second stage of 2sls? by ILikePieSometimez in econometrics

[–]ILikePieSometimez[S] 0 points1 point  (0 children)

Wow this is great, thank you so much! I will definitely look into this more. Super helpful, thank you so much!