The Weak Instrument Problem of the System GMM Estimator in Dynamic Panel Data Models

Maurice Bun () and Frank Windmeijer ()

No 09-086/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: The system GMM estimator for dynamic panel data models combines moment conditions for the model in first differences with moment conditions for the model in levels. It has been shown to improve on the GMM estimator in the first differenced model in terms of bias and root mean squared error. However, we show in this paper that in the covariance stationary panel data AR(1) model the expected values of the concentration parameters in the differenced and levels equations for the cross section at time t are the same when the variances of the individual heterogeneity and idiosyncratic errors are the same. This indicates a weak instrument problem also for the equation in levels. We show that the 2SLS biases relative to that of the OLS biases are then similar for the equations in differences and levels, as are the size distortions of the Wald tests. These results are shown to extend to the panel data GMM estimators.

Keywords: Dynamic Panel Data; System GMM; Weak Instruments (search for similar items in EconPapers)
JEL-codes: C12 C13 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2009-10-09

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Related works:
Working Paper: The Weak Instrument Problem of the System GMM Estimator in Dynamic Panel Data Models (2007)
Working Paper: The weak instrument problem of the system GMM estimator in dynamic panel data models (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:dgr:uvatin:20090086

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