The role of constant instruments in dynamic panel estimation

Chirok Han, Hyoungjong Kim

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

In the standard generalized method of moments estimation of dynamic panel data models, the constant term is usually omitted from instrument sets. As a result, adding a constant to the dependent variable affects the estimates for models without full period dummies. Omitting the constant term from instrument sets may also result in substantial bias and efficiency loss if the mean of the variable is large in magnitude. In this note, we provide analytical and numerical results and propose convenient solutions for practitioners. We suggest that full period dummies be included as extra exogenous instruments even for models without time effects on the right-hand side.

Original languageEnglish
Pages (from-to)500-503
Number of pages4
JournalEconomics Letters
Volume124
Issue number3
DOIs
Publication statusPublished - 2014

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Keywords

  • Constant term
  • Dynamic panel data
  • Generalized method of moments
  • Instrumental variables
  • Period dummies
  • Weak instruments

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

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