Instrumental Variables: Part 1

This lecture covers the concept of instrumental variables (IV) in econometrics, focusing on the intuition behind IV and its application in addressing endogeneity issues. The instructor explains how IV helps in isolating the causal effect of a variable on the outcome by using a third variable that is correlated with the endogenous variable but not with the error term. The lecture delves into the instrumental variables estimator, discussing its relevance and exclusion restriction conditions. Through an example from Card (1995) on college proximity and schooling, the lecture illustrates the practical application of IV in empirical analysis, highlighting the importance of testing for weak instruments and the exogeneity of variables. The lecture concludes by introducing extensions of the IV framework and the generalized method of moments (GMM).