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How to Do xtabond2: An Introduction to "Difference" and "System" GMM in Stata

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David Roodman ()

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Abstract

The Arellano-Bond (1991) and Arellano-Bover (1995)/Blundell-Bond (1998) linear generalized method of moments (GMM) estimators are increasingly popular. Both are general estimators designed for situations with "small T, large N" panels, meaning few time periods and many individuals; with independent variables that are not strictly exogenous, meaning correlated with past and possibly current realizations of the error; with fixed effects; and with heteroskedasticity and autocorrelation within individuals. This pedagogic paper first introduces linear GMM. Then it shows how limited time span and the potential for fixed effects and endogenous regressors drive the design of the estimators of interest, offering Stata-based examples along the way. Next it shows how to apply these estimators with xtabond2. It also explains how to perform the Arellano-Bond test for autocorrelation in a panel after other Stata commands, using abar. The paper closes with some tips for proper use.

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Paper provided by Center for Global Development in its series Working Papers with number 103.

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Length: 42 pages
Date of creation: Nov 2006
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Handle: RePEc:cgd:wpaper:103

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Web page: http://www.cgdev.org

For technical questions regarding this item, or to correct its listing, contact: (David Roodman).

Related research
Keywords: dynamic panel estimation; difference GMM; system GMM; Stata; Arellano-Bond; Blundell-Bond; generalized method of moments; autocorrelation;

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software

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