Using instrumental variables ("IV") is a classical method to deal with endogeneity of explanatory variables.

 

The method of instrumental variables is used to estimate causal relationships. Intuitively, instrumental variables are used when an explanatory variable of interest is correlated with the error term, in which case ordinary least squares give biased results. A valid instrument induces changes in the explanatory variable but has no independent effect on the dependent variable, allowing a researcher to uncover the causal effect of the explanatory variable on the dependent variable.

 

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