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Properties of Fixed Effects Dynamic Panel Data Estimators for a Typical Growth Dataset

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Abstract

This paper investigates the properties of dynamic panel data (DPD) estimators in the context of a typical growth dataset. Using Monte Carlo simulations, we compare the performance of various DPD estimators, namely the Anderson-Hsiao (AH) and Arellano-Bond's General Method of Moment (GMM) one-step and two- step estimators, using the least-square dummy variable (LSDV) as a benchmark. We arrive at three conclusions. First, LSDV produces biased estimates and the biases are significant even for a moderate-sized time dimension. Second, there is no immediately obvious choice to replace LSDV among the estimators considered here. For one, there is the bias-efficiency trade-off. In addition, differences in the characteristics of data influence the performances of the various estimators. Finally, serial correlations in the error terms, even at a low degree, can introduce significant biases to the estimations.

Suggested Citation

  • Arya B. Gaduh, 2002. "Properties of Fixed Effects Dynamic Panel Data Estimators for a Typical Growth Dataset," CSIS Economics Working Paper Series WPE062, Centre for Strategic and International Studies, Jakarta, Indonesia.
    • Handle: RePEc:sis:wpecon:wpe062
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    Keywords

    dynamic panel data estimators; economic growth; Anderson- Hsiao (AH); General Methods of Moment (GMM); least-square dummy variable (LSDV); Monte Carlo simulation.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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