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Macoreconometric dynamic panels (was: Re: st: panel autocorrelation)


From   "Martin Mathes" <mathes@uni-trier.de>
To   statalist@hsphsun2.harvard.edu
Subject   Macoreconometric dynamic panels (was: Re: st: panel autocorrelation)
Date   Sun, 17 Oct 2004 18:56:55 +0200

Dear Christopher, dear Listers,

the topic of our discussion is moving slightly towards a very interesting 
(and fundamental) question: 

What estimator to apply in case of a macroeconometric (!) dynamic 
panel?

I haven't mentioned that my panel is a macroeconometric one so (1) it 
tends to T>N and (2) fixed effects can be assumed to be more 
adequate than random effects (in the case of absence of LDVs). 
The following considerations led me to employ xtreg, fe or/and xtivreg: 
In the case of large T the FE-estimator is consistent (cf eg Bond [p. 5, 
fn 6]). Employing RE instead of FE can afaik be assumed to lead to a 
bias in a case in which FE should obviously be the prefered estimator. 
Furthermore, the paper "Estimating Dynamic Panel Data Models: A 
Practical Guide for Macroeconomists" by Judson/Owen 
(http://papers.ssrn.com/sol3/Delivery.cfm/Delivery.cfm/9705013.pdf?a
bstractid=1904&mirid=1) concludes after running a Monte Carlo 
analysis comparing variants of Arellano-Bond-GMMs and Anderson-
Hsiao-ivregs that with small Ns the latter outperform the first. (Their 
tab 4 indicates that with *very* small N even OLS-FE outperforms AB-
GMM, at least as far as I have understood.) 

It seems to me that - in general - there might be a conflict between a 
panel's quality of beeing a macroeconometric one (-> xtreg fe or 
something xtivreg-like preferable) and a dynamic one (-> xtabond 
preferable). Could including group-dummies in a  xtabond-estimation 
provide a solution? I haven't seen this to be done or discussed yet.

As I am really no expert on this (at least so far...), I would appreciate 
your (and the listers') comments on this issue very much. 

And last but not least: If I kept my initial choice of estimators, would 
there be any possibility to test for autocorr?

Martin
 

> Drop the notion of the fixed effects estimator. It does not make sense
> in a dynamic context (for good reason, as any paper underlying the
> Arellano-Bond approach indicates) as an OLS technique is unable to
> cope with the correlation between the demeaned LDV and the demeaned
> error process. (You would run into the same trouble if you did the
> XTREG,FE 'by hand' with firm dummies, or with 'areg'). An excellent
> guide to the DPD estimators is provided in Steve Bond's ``Dynamic
> panel data models: a guide to microdata methods and practice",
> available from EconPapers (CeMMAP working paper 09/02 at Institute for
> Fiscal Studies): http://econpapers.repec.org I don't see that in the
> presence of a LDV that you can successfully employ FE.
> 
> Kit Baum, Boston College Economics      baum@bc.edu
> http://ideas.repec.org/e/pba1.html
> 
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Martin Mathes
Universität Trier
FB IV - VWL
Europäische Wirtschaftspolitik
D-54286 Trier
Tel.: ++49-651-201-2747, -2739
Fax: ++49-651-201-3934
e-mail: mathes@uni-trier.de


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