Thomas Lumley • 4/30/2025

Two-stage least squares

This article provides a detailed, technical overview of the Two-Stage Least Squares (2SLS) regression method used in econometrics and causal inference. It explains the core problem of confounding, the role of instrumental variables (Z), and the mathematical derivation of the estimator. The content delves into the equivalence of ratio and two-stage formulations, the calculation of the estimator's asymptotic variance, and important nuances in using the correct residual variance for consistent standard error estimation.

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#Causal Inference #Econometrics #Regression Analysis