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On the effect of mean-nonstationarity in dynamic panel data models

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  • Hayakawa, Kazuhiko

Abstract

In this paper, we investigate the effect of mean-nonstationarity on the first-difference generalized method of moments (FD-GMM) estimator in dynamic panel data models. We find that when data is mean-nonstationary and the variance of individual effects is significantly larger than that of disturbances, the FD-GMM estimator performs quite well. We demonstrate that this is because the correlation between the lagged dependent variable and instruments gets larger owing to the unremoved individual effects, i.e., instruments become strong. This implies that, under mean-nonstationarity, the FD-GMM estimator does not always suffer from the weak instruments problem even when data is persistent.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 153 (2009)
Issue (Month): 2 (December)
Pages: 133-135

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Handle: RePEc:eee:econom:v:153:y:2009:i:2:p:133-135

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Web page: http://www.elsevier.com/locate/jeconom

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Keywords: Dynamic panel data models Strength of instruments Generalized method of moments estimator Mean-nonstationarity;

References

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  1. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  3. Alvarez, J. & Arellano, M., 1998. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Papers 9808, Centro de Estudios Monetarios Y Financieros-.
  4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  5. Frank Kleibergen, 2005. "Testing Parameters in GMM Without Assuming that They Are Identified," Econometrica, Econometric Society, vol. 73(4), pages 1103-1123, 07.
  6. Manuel Arellano, 2003. "Modelling Optimal Instrumental Variables For Dynamic Panel Data Models," Working Papers wp2003_0310, CEMFI.
  7. Bun, Maurice J.G. & Kiviet, Jan F., 2006. "The effects of dynamic feedbacks on LS and MM estimator accuracy in panel data models," Journal of Econometrics, Elsevier, vol. 132(2), pages 409-444, June.
  8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  9. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  10. Kazuhiko Hayakawa, 2008. "On the Effect of Nonstationary Initial Conditions in Dynamic Panel Data Models," Hi-Stat Discussion Paper Series d07-245, Institute of Economic Research, Hitotsubashi University.
  11. Kazuhiko Hayakawa, 2007. "A Simple Efficient Instrumental Variable Estimator in Panel AR(p) Models," Hi-Stat Discussion Paper Series d07-213, Institute of Economic Research, Hitotsubashi University.
  12. Hause, John C, 1980. "The Fine Structure of Earnings and the On-the-Job Training Hypothesis," Econometrica, Econometric Society, vol. 48(4), pages 1013-29, May.
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Cited by:
  1. Maurice J.G. Bun & Sarafidis, V., 2013. "Dynamic Panel Data Models," UvA-Econometrics Working Papers 13-01, Universiteit van Amsterdam, Dept. of Econometrics.
  2. Bontempi, Maria Elena & Mammi, Irene, 2012. "A strategy to reduce the count of moment conditions in panel data GMM," MPRA Paper 40720, University Library of Munich, Germany.
  3. Arturas Juodis, 2013. "First Difference Transformation in Panel VAR models: Robustness, Estimation and Inference," UvA-Econometrics Working Papers 13-06, Universiteit van Amsterdam, Dept. of Econometrics.
  4. Rosen Azad Chowdhury & Bill Russell, 2012. "The Difference, System and ‘Double-D’ GMM Panel Estimators in the Presence of Structural Breaks," Dundee Discussion Papers in Economics 268, Economic Studies, University of Dundee.
  5. Aquaro, M., 2013. "Pairwise difference estimation of linear panel data," Open Access publications from Tilburg University urn:nbn:nl:ui:12-5904974, Tilburg University.
  6. Takuya Hasebe, 2012. "The tests for the level moment conditions: GMM estimation in a linear dynamic panel data model," Economics Bulletin, AccessEcon, vol. 32(1), pages 412-420.
  7. Arturas Juodis, 2013. "Cointegration Testing in Panel VAR Models Under Partial Identification and Spatial Dependence," UvA-Econometrics Working Papers 13-08, Universiteit van Amsterdam, Dept. of Econometrics.

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