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“Valid t-ratio Inference for instrumental variables”

A couple people pointed me to this recent econometrics paper, which begins:

In the single IV model, current practice relies on the first-stage F exceed- ing some threshold (e.g., 10) as a criterion for trusting t-ratio inferences, even though this yields an anti-conservative test. We show that a true 5 percent test instead requires an F greater than 104.7. Maintaining 10 as a threshold requires replacing the critical value 1.96 with 3.43. We re-examine 57 AER papers and find that corrected inference causes half of the initially presumed statistically significant results to be insignificant. We introduce a more powerful test, the tF procedure, which provides F-dependent adjusted t-ratio critical values.

I don’t like this sort of thing as it seems to be focusing on binary decisions in a way that seems inappropriate to me. To me, this sort of paper is the rough equivalent of some sort of Talmudic argument about whether God can dig a ditch so wide he can’t jump across it. I just don’t buy into the premise so it’s hard for me to go further. But maybe the paper is useful for people who work within that framework.



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