A Cautionary Note on Tests for Overidentifying Restrictions
Paper number: 11/11
Paper Category: Discussion Paper
Paulo M.D.C. Parente (Department of Economics, University of Exeter)
Joao M.C. Santos Silva (University of Essex and CEMAPRE)
Tests of overidentifying restrictions are widely used in practice. However, there is often confusion about the nature of their null hypothesis and about the interpretation of their outcome. In this note we argue that these tests give little information on whether the instruments are correlated with the errors of the underlaying economic model and on whether they identify parameters of interest.