Very short question. What exactly is the difference between an instrumental variable and a proxy variable when building a regression model?
An instrumental variable is used to help estimate a causal effect (or to alleviate measurement error). The instrumental variable must affect the independent variable of interest, and only affect the dependent variable through the independent variable of interest. This is called an exclusion restriction.
A proxy variable is a variable you use because you think it is correlated with the variable you are really interested in, but have no (or poor) measurement of.