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Generalized method of moments estimation of linear dynamic panel-data models

Sebastian Kripfganz

London Stata Conference 2019 from Stata Users Group

Abstract: In dynamic models with unobserved group-specific effects, the lagged dependent variable is an endogenous regressor by construction. The conventional fixed-effects estimator is biased and inconsistent under fixed-T asymptotics. To deal with this problem, "difference GMM" and "system GMM" estimators in the spirit of Arellano and Bond (1991, Review of Economic Studies), Arellano and Bover (1995, Journal of Econometrics), and Blundell and Bond (1998, Journal of Econometrics) are predominantly applied in practice. While Stata has the official commands xtabond and xtdpdsys—both are wrappers for xtdpd—the Stata community widely associates these methods with the xtabond2 command provided by Roodman (2009, Stata Journal). 10 years after Roodman's award winning Stata Journal article, this presentation revisits the GMM estimation of dynamic panel-data models in Stata. I present the new command, xtdpdgmm, that addresses some shortcomings of xtabond2 and adds further flexibility to the specification of the estimators. In particular, it allows to incorporate the Ahn and Schmidt (1995, Journal of Econometrics) nonlinear moment conditions that can improve the efficiency and robustness of the estimation. Besides the familiar one-step and two-step estimators, xtdpdgmm also provides the Hansen, Heaton, and Yaron (1996, Journal of Business & Economic Statistics) iterated GMM estimator. While it can be pedagogically useful to think about "system GMM" as a system of a level equation and an equation in first differences or forward-orthogonal deviations, I explain that the resulting estimator can still be regarded as a "level GMM" estimator with a set of transformed instruments. These transformed instruments can be obtained as a postestimation feature and used for subsequent specification tests, for example with the ivreg2 command suite of Baum, Schaffer, and Stillman (2003 and 2007, Stata Journal). I further address common pitfalls and frequently asked questions about the estimation of linear dynamic panel-data models.

Date: 2019-09-15
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