A solution to the problem of too many instruments in dynamic panel data GMM
AbstractThe well-known problem of too many instruments in dynamic panel data GMM is dealt with in detail in Roodman (2009, Oxford Bull. Econ. Statist.). The present paper goes one step further by providing a solution to this problem: factorisation of the standard instrument set is shown to be a valid transformation for ensuring consistency of GMM. Monte Carlo simulations show that this new estimation technique outperforms other possible transformations by having a lower bias and RMSE as well as greater robustness of overidentifying restrictions. The researcher's choice of a particular transformation can be replaced by a data-driven statistical decision. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2009,31.
Date of creation: 2009
Date of revision:
Dynamic panel data; generalised method of moments; instrument proliferation; factor analysis;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-19 (All new papers)
- NEP-ECM-2009-12-19 (Econometrics)
- NEP-ETS-2009-12-19 (Econometric Time Series)
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