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A solution to the problem of too many instruments in dynamic panel data GMM

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  • Mehrhoff, Jens

Abstract

The well-known problem of too many instruments in dynamic panel data GMM is dealt with in detail in Roodman (2009, Oxford Bull. Econ. Statist.). The present paper goes one step further by providing a solution to this problem: factorisation of the standard instrument set is shown to be a valid transformation for ensuring consistency of GMM. Monte Carlo simulations show that this new estimation technique outperforms other possible transformations by having a lower bias and RMSE as well as greater robustness of overidentifying restrictions. The researcher's choice of a particular transformation can be replaced by a data-driven statistical decision.

Suggested Citation

  • Mehrhoff, Jens, 2009. "A solution to the problem of too many instruments in dynamic panel data GMM," IBES Diskussionsbeitr√§ge 171, University of Duisburg-Essen, Institute of Business and Economic Studie (IBES).
  • Handle: RePEc:zbw:udewwd:171
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    Cited by:

    1. Tong, Eric, 2017. "US monetary policy and global financial stability," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 466-485.
    2. repec:vrs:reoecp:v:17:y:2017:i:1:p:3-24:n:1 is not listed on IDEAS
    3. repec:eee:ecmode:v:70:y:2018:i:c:p:259-271 is not listed on IDEAS
    4. repec:eee:wdevel:v:102:y:2018:i:c:p:243-261 is not listed on IDEAS
    5. Iyke Bernard Njindan, 2017. "Does Trade Openness Matter for Economic Growth in the CEE Countries?," Review of Economic Perspectives, De Gruyter Open, vol. 17(1), pages 3-24, March.
    6. Lukasz Marc, 2012. "New Evidence on Fungibility at the Aggregate Level," Tinbergen Institute Discussion Papers 12-083/2, Tinbergen Institute.

    More about this item

    Keywords

    Dynamic Panel Data; Generalised Method of Moments; Instrument Proliferation; Factor Analysis;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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