Question: (Instrumental variable method) Consider the linear regression model y=a+Bx, +u One of the assumptions we have made is that x, are uncorrelated with the errors

(Instrumental variable method) Consider the linear regression model y=a+Bx, +u One of the assumptions we have made is that x, are uncorrelated with the errors u,. If x, are correlated with u,, we have to look for a variable that is uncorrelated with u, (but correlated with x). Let us call this variable z. z, is called an instrumental variable. Note that, as explained in Section 3.3, the assumptions E(u) = 0 and cov(x, x) = 0 are replaced by?

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