Consider the following simple regression model y = ₀ + ₁x₁ + u. Suppose z is an instrument for x. Which of the following conditions denotes instrument relevance? A)Cov(z,u) 0 B)Cov(z,u)

Question

Consider the following simple regression model y = ₀ + ₁x₁ + u. Suppose z is an instrument for x. Which of the following conditions denotes instrument relevance? A)Cov(z,u) > 0 B)Cov(z,u) < 0 C) Cov(z,x) 0 D) Cov(z,x z) = 0

Quizplus · Accepted Answer

Instrument relevance requires that the instrument (z) is correlated with the endogenous variable (x). Therefore, the correct condition is Cov(z,x) ≠ 0. Choices A and B are not relevant for instrument relevance. Choice D refers to the condition of instrument exogeneity, which is different from instrument relevance. The condition Cov(z,x) 11eab06d_2548_723c_beed_2781b0e27bf9_TB2133_11 0 denotes instrument relevance.

Consider the Following Simple Regression Model Y = 0

Consider the Following Simple Regression Model Y = ₀