The role of constant instruments in dynamic panel estimation

Chirok Han and Hyoungjong Kim

Economics Letters, 2014, vol. 124, issue 3, 500-503

Abstract: In the standard generalized method of moments estimation of dynamic panel data models, the constant term is usually omitted from instrument sets. As a result, adding a constant to the dependent variable affects the estimates for models without full period dummies. Omitting the constant term from instrument sets may also result in substantial bias and efficiency loss if the mean of the variable is large in magnitude. In this note, we provide analytical and numerical results and propose convenient solutions for practitioners. We suggest that full period dummies be included as extra exogenous instruments even for models without time effects on the right-hand side.

Keywords: Dynamic panel data; Constant term; Period dummies; Generalized method of moments; Instrumental variables; Weak instruments (search for similar items in EconPapers)
JEL-codes: C13 C23 C26 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:124:y:2014:i:3:p:500-503

DOI: 10.1016/j.econlet.2014.07.021

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