GMM estimation for dynamic panels with fixed effects and strong instrument at unity

• Main Authors: HAN, C., PHILLIPS, Peter C. B.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2010
• Subjects: Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2125
• Institution: Singapore Management University

This paper develops new estimation and inference procedures for dynamic panel data models with fixed effects and incidental trends. A simple consistent GMM estimation method is proposed that avoids the weak moment condition problem that is known to affect conventional GMM estimation when the autoregressiye coefficient (rho) is near unity. In both panel and time series cases, the estimator has standard Gaussian asymptotics for all values of rho is an element of (-1, 1] irrespective of how the composite cross-section and time series sample sizes pass to infinity. Simulations reveal that the estimator has little bias even in very small samples. The approach is applied to panel unit root testing.