Automating the selection of model-implied instrumental variables

Recently, interest has grown in the use of instrumental variables (IVs) in estimating factor analysis and latent variable models such as structural equations models. Bollen (1996) suggested a two-stage least squares (2SLS) technique that makes use of model-implied IVs in estimating the measurement and latent variable models. Model-implied instrumental variables are the observed variables in the model that can serve as instrumental variables in a given equation. One difficulty inhibiting the practical use of the 2SLS estimator is identifying the model-implied IVs. The authors provide a simple procedure that identifies the model-implied IVs and a computer algorithm that can easily be implemented to automate the selection of IVs for simultaneous equations, factor analysis, and latent variable models.