Two Stage Least Squares is calculated as follows; in the first stage:
A)Y is regressed on the exogenous variables only. The predicted value of Y is then regressed on the instrumental variables.
B)the unknown coefficients in the reduced form equation are estimated by OLS, and the predicted values are calculated. In the second stage, Y is regressed on these predicted values and the other exogenous variables.
C)the exogenous variables are regressed on the instruments. The predicted value of the exogenous variables is then used in the second stage, together with the instruments, to predict the dependent variable.
D)the unknown coefficients in the reduced form equation are estimated by weighted least squares, and the predicted values are calculated. In the second stage, Y is regressed on these predicted values and the other exogenous variables.

Question

Quizplus · Accepted Answer

In the first stage of Two Stage Least Squares (2SLS), the endogenous explanatory variables are regressed on all the exogenous variables and instruments to obtain predicted values. In the second stage, the dependent variable Y is regressed on these predicted values and any other exogenous variables. This process helps to address the issue of endogeneity in the explanatory variables.

Two Stage Least Squares Is Calculated as Follows; in the First