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First Difference or Forward Orthogonal Deviation- Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study

  • Kazuhiko Hayakawa


    (Hiroshima University)

This paper compares the performances of the generalized method of moments (GMM) estimator of dynamic panel data model wherein unobserved individual effects are removed by the forward orthogonal deviation or the first difference. The simulation results show that the GMM estimator of the model transformed by the forward orthogonal deviation tends to work better than that transformed by the first difference.

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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 29 (2009)
Issue (Month): 3 ()
Pages: 2008-2017

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Handle: RePEc:ebl:ecbull:eb-09-00361
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  1. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
  2. 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.
  3. 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.
  4. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
  5. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
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