Sarafidis, Vasilis (2009): GMM Estimation of Short Dynamic Panel Data Models With Error Cross-Sectional Dependence.
Download (339kB) | Preview
This paper considers the issue of GMM estimation of a short dynamic panel data model when the errors are correlated across individuals. We focus particularly on the conditions required in the cross-sectional dimension of the error process for the dynamic panel GMM estimator to remain consistent. To this end, we demonstrate that cross-sectional independence (or uncorrelatedness) is not necessary - rather, it suffices that, if there is such correlation in the errors, this is weak. We define a stochastic scalar sequence to be cross-sectionally weakly correlated at any given point in time if the sequence of the covariances of the observations across individuals i and j at time t, given the conditioning set of all time-invariant characteristics of individuals i and j, converges absolutely as N grows large. Spatial dependence satisfies this condition but factor structure dependence does not. Consequently, the dynamic panel GMM estimator is consistent only in the first case. Under cross-sectionally weakly correlated errors, an additional, non-redundant, set of moment conditions becomes relevant for each i - specifically, instruments with respect to the individual(s) which unit i is correlated with. We demonstrate that these moment conditions remain valid when the errors are subject to both weak and strong correlations, in which situation the standard moment conditions with respect to individual i itself are invalidated - meaning that the dynamic panel GMM estimator is inconsistent. Simulated experiments show that the resulting method of moments estimators largely outperform the conventional ones in terms of both median bias and root median square error.
|Item Type:||MPRA Paper|
|Original Title:||GMM Estimation of Short Dynamic Panel Data Models With Error Cross-Sectional Dependence|
|Keywords:||Dynamic panel data, spatial dependence, factor structure dependence, Generalised Method of Moments|
|Subjects:||C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C13 - Estimation: General
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C31 - Cross-Sectional Models ; Spatial Models ; Treatment Effect Models ; Quantile Regressions ; Social Interaction Models
C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C33 - Panel Data Models ; Spatio-temporal Models
|Depositing User:||Vasilis Sarafidis|
|Date Deposited:||20. Sep 2010 16:41|
|Last Modified:||15. Feb 2013 17:31|
Ahn, S.C and P. Schmidt, (1995) "Efficient Estimations of Models for Dynamic Panel Data", Journal of Econometrics, 68, 5-28.
Anderson, T.W. and C. Hsiao (1981) "Estimation of Dynamic Models with Error Components", Journal of the American Statistical Association, 76, 598-606.
Arellano, M. (1993) "On the Testing of Correlated Effects with Panel Data", Journal of Econometrics, 59, 87-97.
Arellano, M. and S. Bond (1991) "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations", Review of Economic Studies, 58, 277-297.
Arellano, M. and O. Bover (1995) "Another Look at the Instrumental Variable Estimation of Error-Component Models", Journal of Econometrics, 68, 29-51.
Bai, J. (2005) "Panel Data Models with Interactive Fixed Effects", unpublished manuscript.
Baltagi, B., Bresson, G. and A. Pirotte (2007) "Panel Unit Root Tests and Spatial Dependence", Journal of Applied Econometrics, 22, 339-360.
Blundell, R. and S. Bond (1998) "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models", Journal of Econometrics, 87, 115-143.
Bover, O. and N. Watson (2005) "Are there economies of scale in the demand for money by firms? Some panel data estimates", Journal of Monetary Economics, 52, 1569-1589.
Breusch, T., Qian, H., Schmidt, P. and D. Wyhowski, 1999, "Redundancy of moment conditions". Journal of Econometrics 91, 89-111.
un, M.J.G. and J.F. Kiviet (2006) "The Effects of Dynamic Feedbacks on LS and MM Estimator Accuracy in Panel Data Models", Journal of Econometrics 132, 409-444.
Coakley, J., Fuertes, A. and Smith, R. (2002) "A Principal Components Approach to Cross-Section Dependence in Panels", Unpublished manuscript, Birckbeck College, University of London.
Conley, T.G. (1999) "GMM Estimation with cross-sectional Dependence", Journal of Econometrics, 92, 1-45.
Goldberger, A.S. (1972) "Structural Equation Methods in the Social Sciences", Econometrica, 40, 979-1001.
Joreskog, K.G. and A.S. Goldberger (1975) "Estimation of a model with multiple indicators and multiple causes of a single latent variable", Journal of the American Statistical Association, 70, 631-639.
Kapoor, M., Kelejian, H., and I.R. Prucha (2007) "Panel Data Models with Spatially Correlated Error Components", Journal of Econometrics 140, 97-130.
Kelejian, H and D. Robinson (1995) "Spatial Correlation: A Suggested Alternative to the Autoregressive Model", in Anselin, L. and R.J. Florax (ed.), New Directions in Spatial Econometrics, 75-95, Springer-Verlag, Berlin.
Kiviet, J.F., (1995) "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models", Journal of Econometrics, 68, 53-78.
Lee, L. (2007) "GMM and 2SLS Estimation of Mixed Regressive, Spatial Autoregressive Models", Journal of Econometrics 137, 489-514.
Moon, H.R. and B. Perron (2004) "Efficient Estimation of the SUR Cointegrating Regression Model and Testing for Purchasing Power Parity", Econometric Reviews, Vol. 23, 293-323.
Pesaran, H. (2006) "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure", Econometrica, 74, 967-1012.
Pesaran, H. and E. Tosetti (2007) "Large Panels with Common Factors and Spatial Correlations", unpublished manuscript.
Phillips, P. and D. Sul (2003) "Dynamic Panel Estimation and Homogeneity Testing under cross-sectional Dependence", The Econometrics Journal, Vol. 6, 217-259.
Phillips, P. and D. Sul (2007). "Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and cross-sectional Dependence", Journal of Econometrics, 137, 162-188.
Robertson, D. and Symons, J. (2000) "Factor Residuals in SUR Regressions: Estimating Panels Allowing for cross-sectional Correlation", unpublished manuscript, Faculty of Economics and Politics, University of Cambridge.
Sarafidis, V. Yamagata, T. and D. Robertson (2008) "A Test of Error Cross-section Dependence for a Linear Dynamic Panel Model with Regressors", unpublished manuscript.
Sarafidis, V. and D. Robertson (2008) "On the Impact of cross-sectional Dependence in Short Dynamic Panel Estimation", unpublished manuscript.
Stetzer, F. (1982) "Specifying Weights in Spatial Forecasting Models: The Results of Some Experiments", Environment and Planning A, 14, 571-584.
Stout, W. (1974) "Almost Sure Convergence", Academic Press, New York.
Windmeijer, F. (2000) "Efficiency Comparisons for a System GMM Estimator in Dynamic Panel Data Models", in R.D.H. Heijmans, D.S.G. Pollock and A. Satora (ed.), Innovations in Multivariate Statistical Analysis, Dordrecht: Kluwer Academic Publishers.
Available Versions of this Item
- GMM Estimation of Short Dynamic Panel Data Models With Error Cross-Sectional Dependence. (deposited 20. Sep 2010 16:41) [Currently Displayed]