Which of the following statements is incorrect?
A) Equations that are part of a recursive system can be validly estimated using OLS
B) Unnecessary use of two-stage least squares (2SLS) - i.e. on a set of right hand side variables that are in fact exogenous - will result in consistent but inefficient coefficient estimates.
C) 2SLS is just a special case of instrumental variables (IV) estimation.
D) 2SLS and indirect least squares (ILS) are equivalent for over-identified systems.

Question

Quizplus · Accepted Answer

2SLS and ILS are not equivalent for over-identified systems. 2SLS can be used in over-identified systems by using multiple instruments, whereas ILS is specifically designed for exactly identified systems, where the number of instruments equals the number of endogenous variables.

Which of the Following Statements Is Incorrect