IV and Modelling Expectations

Load the data in the usual way

Making a Lag is easy now we want to make a lead (a future variable) this is just making a lag with a negative lag length (-1 for one period ahead)

Change the name to remember its an expectation

The lag variable looses an observation at the begining

The lead variable looses one at the end

First do the two stage least squares model in two stages, begin by constructing the instrument.

Now do the same model in one go by IV

Same coefficients Different standard errors and t stats