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The role of constant instruments in dynamic panel estimation

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  • Han, Chirok
  • Kim, Hyoungjong

Abstract

In the standard generalized method of moments estimation of dynamic panel data models, the constant term is usually omitted from instrument sets. As a result, adding a constant to the dependent variable affects the estimates for models without full period dummies. Omitting the constant term from instrument sets may also result in substantial bias and efficiency loss if the mean of the variable is large in magnitude. In this note, we provide analytical and numerical results and propose convenient solutions for practitioners. We suggest that full period dummies be included as extra exogenous instruments even for models without time effects on the right-hand side.

Suggested Citation

  • Han, Chirok & Kim, Hyoungjong, 2014. "The role of constant instruments in dynamic panel estimation," Economics Letters, Elsevier, vol. 124(3), pages 500-503.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:3:p:500-503
    DOI: 10.1016/j.econlet.2014.07.021
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    References listed on IDEAS

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    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. 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.
    3. 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.
    4. Breusch, Trevor & Qian, Hailong & Schmidt, Peter & Wyhowski, Donald, 1999. "Redundancy of moment conditions," Journal of Econometrics, Elsevier, vol. 91(1), pages 89-111, July.
    5. 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.
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    Citations

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    Cited by:

    1. Tue Gørgens & Allan H. Würtz, 2019. "Threshold Regression with Endogeneity for Short Panels," Econometrics, MDPI, vol. 7(2), pages 1-8, May.
    2. Huy Quang Doan, 2019. "Trade, Institutional Quality and Income: Empirical Evidence for Sub-Saharan Africa," Economies, MDPI, vol. 7(2), pages 1-23, May.
    3. Gørgens, Tue & Han, Chirok & Xue, Sen, 2020. "On the asymptotic distribution of the quadratic GMM estimator of a dynamic panel data model under a unit root," Economics Letters, Elsevier, vol. 197(C).
    4. Tue Gørgens & Chirok Han & Sen Xue, 2019. "Moment Restrictions and Identification in Linear Dynamic Panel Data Models," Annals of Economics and Statistics, GENES, issue 134, pages 149-176.
    5. Hao, Bowen & Prokhorov, Artem & Qian, Hailong, 2018. "Moment redundancy test with application to efficiency-improving copulas," Economics Letters, Elsevier, vol. 171(C), pages 29-33.
    6. Harkmann, Kersti & Staehr, Karsten, 2021. "Current account drivers and exchange rate regimes in Central and Eastern Europe," Journal of International Money and Finance, Elsevier, vol. 110(C).
    7. Sarwar, Suleman & Shahzad, Umer & Chang, Dongfeng & Tang, Biyan, 2019. "Economic and non-economic sector reforms in carbon mitigation: Empirical evidence from Chinese provinces," Structural Change and Economic Dynamics, Elsevier, vol. 49(C), pages 146-154.
    8. Chirok Han & Hyoungjong Kim, 2023. "Dynamic panel GMM estimators with improved finite sample properties using parametric restrictions for dimension reduction," Empirical Economics, Springer, vol. 64(6), pages 2589-2610, June.
    9. Andriansyah & Asep Nurwanda & Bakhtiar Rifai, 2023. "Structural Change and Regional Economic Growth in Indonesia," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 59(1), pages 91-117, January.
    10. Tue Gorgens & Chirok Han & Sen Xue, 2016. "Asymptotic distributions of the quadratic GMM estimator in linear dynamic panel data models," ANU Working Papers in Economics and Econometrics 2016-635, Australian National University, College of Business and Economics, School of Economics.
    11. Kersti Harkmann & Karsten Staehr, 2019. "Current account dynamics and exchange rate regimes in Central and Eastern Europe," Bank of Estonia Working Papers wp2018-08, Bank of Estonia, revised 23 Jan 2019.
    12. Chirok Han & Hyoungjong Kim, 2017. "Heteroskedasticity-Robust Standard Errors for Dynamic Panel Data Models with Fixed Effects," Discussion Paper Series 1703, Institute of Economic Research, Korea University.

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    More about this item

    Keywords

    Dynamic panel data; Constant term; Period dummies; Generalized method of moments; Instrumental variables; Weak instruments;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation

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