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Bias Corrected Instrumental Variables Estimation for Dynamic Panel Models with Fixed E¤ects

  • Jinyong Hahn

    (UCLA)

  • Jerry Hausman
  • Guido Kuersteiner

    ()

    (Department of Economics, Boston University)

This paper proposes a new instrumental variables estimator for a dynamic panel model with .xed e¤ects with good bias and mean squared error properties even when identi.cation of the model becomes weak near the unit circle. We adopt a weak instrument asymptotic approximation to study the behavior of various estimators near the unit circle. We show that an estimator based on long di¤erencing the model is much less biased than conventional implementations of the GMM estimator for the dynamic panel model. We also show that under the weak instrument approximation such conventional estimators are dominated in terms of mean squared error by an estimator with far less moment conditions. The long di¤erence estimator mimics the infeasible optimal procedure through its reliance on a small set of moment conditions.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2005-024.

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Length: 57 pages
Date of creation: Jul 2005
Date of revision:
Handle: RePEc:bos:wpaper:wp2005-024
Contact details of provider: Postal: 270 Bay State Road, Boston, MA 02215
Phone: 617-353-4389
Fax: 617-353-4449
Web page: http://www.bu.edu/econ/

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  19. Hahn, Jinyong, 1999. "How informative is the initial condition in the dynamic panel model with fixed effects?," Journal of Econometrics, Elsevier, vol. 93(2), pages 309-326, December.
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