Definition of Instruments: When regressors are correlated to errors in a model, one may be able to replace the regressors by estimates for these regressors that are not correlated to the errors. This is the technique of instrumental variables , and the replacement regressors are called instruments.

The replacement regressors are constructed by running regressions of the original regressors on exogenous variables that are called the instrumental variables. (Econterms)

Terms related to Instruments:

• Instrumental variables