Using Synthetic Variables in Instrumental Variable Estimation of Spatial Series Models

Identification of suitable instruments is a critical step for the implementation of instrumental variable (IV) estimation. A challenge is that, as the level of correlation between the instruments and the endogenous variable increases, so also do the chances that the instruments themselves will be correlated with the error terms. Contrariwise, when the correlation with the endogenous variable is low, the instruments may be weak and perform …