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IV Estimation of Panels with Factor Residuals

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  • Donald Robertson
  • Vasilis Sarafidis

Abstract

This paper proposes a new instrumental variables approach for consistent and asymptotically efficient estimation of panel data models with weakly exogenous or endogenous regressors and residuals generated by a multifactor error structure. In this case, the standard dynamic panel estimators fail to provide consistent estimates of the parameters. The novelty of our approach is that we introduce new parameters to represent the unobserved covariances between the instruments and the factor component of the residual; these parameters are estimable when N is large. Some important estimation and identification issues are studied in detail. The finite sample performance of the proposed estimators is investigated using simulated data. The results show that the method produces reliable estimates of the parameters over several parametrisations.

Suggested Citation

  • Donald Robertson & Vasilis Sarafidis, 2013. "IV Estimation of Panels with Factor Residuals," Cambridge Working Papers in Economics 1321, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:1321
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    More about this item

    Keywords

    Generalised Method of Moments; Dynamic Panel Data; Factor Residuals.;
    All these keywords.

    JEL classification:

    • 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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