INSTRUMENTAL VARIABLES ESTIMATION AND THE COEFFICIENT OF DETERMINATION

We first demonstrate that Instrumental Variables\n(IV) may be viewed as a two-step OLS estimator.\nSubsequently, we show that the coefficient of\ndetermination based on IV residuals does not lie\nbetween 0 and 1. As an alternative we suggest the\nuse of the coefficient of determination from the second\nstep of the two-step OLS interpretation of IV. The\nproperties of said R2 are investigated and its relationship\nto the R2 suggested by Carter and Nagar\nfor simultaneous equations is examined.