This discussion paper resulted in a publication in Econometric Reviews, 2014, 33(1-4), 3-35.
We discuss Bayesian inferential procedures within the family of instrumental variables regression models and focus on two issues: existence conditions for posterior moments of the parameters of interest under a flat prior and the potential of Direct Monte Carlo (DMC) approaches for efficient evaluation of such possibly highly onelliptical posteriors. We show that, for the general case of m endogenous variables under a flat prior, posterior moments of order r exist for the coefficients reflecting the endogenous regressors’ effect on the dependent variable, if the number of instruments is greater than m+r, even though there is an issue of local non-identification that causes non-elliptical shapes of the posterior. This stresses the need for efficient Monte Carlo integration methods. We introduce an extension of DMC that incorporates an acceptance-rejection sampling step within DMC. This Acceptance-Rejection within Direct Monte Carlo (ARDMC) method has the attractive property that the generated random drawings are independent, which greatly helps the fast convergence of simulation results, and which facilitates the evaluation of the numerical accuracy. The speed of ARDMC can be easily further improved by making use of parallelized computation using multiple core machines or computer clusters. We note that ARDMC is an analogue to the well-known 'Metropolis-Hastings within Gibbs' sampling in the sense that one 'more difficult' step is used within an 'easier' simulation method. We compare the ARDMC approach with the Gibbs sampler using simulated data and two empirical data sets, involving the settler mortality instrument of Acemoglu et al. (2001) and father's education's instrument used by Hoogerheide et al. (2012a). Even without making use of parallelized computation, an efficiency gain is observed both under strong and weak instruments, where the gain can be enormous in the latter case.