A solution to the problem of too many instruments in dynamic panel data GMM

Jens Mehrhoff

No 2009,31, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: The well-known problem of too many instruments in dynamic panel data GMM is dealt with in detail in Roodman (2009, Oxford Bull. Econ. Statist.). The present paper goes one step further by providing a solution to this problem: factorisation of the standard instrument set is shown to be a valid transformation for ensuring consistency of GMM. Monte Carlo simulations show that this new estimation technique outperforms other possible transformations by having a lower bias and RMSE as well as greater robustness of overidentifying restrictions. The researcher's choice of a particular transformation can be replaced by a data-driven statistical decision.

Keywords: Dynamic panel data; generalised method of moments; instrument proliferation; factor analysis (search for similar items in EconPapers)
JEL-codes: C13 C15 C23 C81 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:200931

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