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Default and collapsed instruments in dynamic panel GMM: a Monte Carlo comparison

Author

Listed:
  • John Levendis

    (Tulane University)

Abstract

The Arellano-Bond type dynamic panel estimators are known to suffer from over-instrumentation. Using Monte Carlo simulations, we compare Difference and System GMM with both default and collapsed instrument sets across varying numbers of countries and time periods typical in macroeconomic analysis. Collapsing consistently outperforms default instrumentation, providing more accurate estimates, especially as T increases. System GMM with collapsed instruments performs best overall, especially for endogenous variables. These findings strongly support using collapsed instruments for the analysis of macroeconomic panels, regardless of the number of countries or time periods.

Suggested Citation

  • John Levendis, 2025. "Default and collapsed instruments in dynamic panel GMM: a Monte Carlo comparison," Economics Bulletin, AccessEcon, vol. 45(4), pages 1915-1925.
    • Handle: RePEc:ebl:ecbull:eb-25-00206
    as

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    References listed on IDEAS

    as
    1. 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.
    2. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    3. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    4. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    5. 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.
    6. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LLC, vol. 9(1), pages 86-136, March.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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