The equivalence of two-step first difference and forward orthogonal deviations GMM

Robert Phillips

Economics Bulletin, 2020, vol. 40, issue 4, 2865-2871

Abstract: Generalized method of moments (GMM) estimation of a dynamic panel data model often relies on transforming the data. This note provides a necessary and sufficient condition on the instruments for two-step GMM based on differencing to be equivalent to two-step GMM based on forward orthogonal deviations. The same condition is necessary and sufficient for system GMM, based on differencing, to be equal to system GMM using forward orthogonal deviations.

Keywords: first-difference GMM; fixed effects; forward orthogonal demeaning; forward orthogonal deviations; system GMM (search for similar items in EconPapers)
JEL-codes: C2 (search for similar items in EconPapers)
Date: 2020-10-23
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