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


From   "Salvati, Jean" <JSalvati@imf.org>
To   <statalist@hsphsun2.harvard.edu>
Subject   RE: Macoreconometric dynamic panels (was: Re: st: panel autocorrelation)
Date   Mon, 18 Oct 2004 12:36:46 -0400

Just correcting my previous post (Beware of Monday morning certainties
:), and apologizing for involving Kit Baum in my errors:
 
> - As pointed by Kit Baum, the "within" or "fixed effect" 
> estimator implemented in -xtivreg, fe- is not consistent in 
> the case of a DPD model. If there is a lag of the dependent 
> variable on the RHS of your equation, you should never, ever 
> use -xtivreg, fe- :)

Actually, there are DPD cases where the within estimator (-xtivreg,fe-)
is consistent. Martin's original comment ("In the case of large T the
FE-estimator is consistent (cf eg Bond [p. 5, fn 6])") was certainly
correct. This result is also shown by Anderson and Hsiao (1981).

It's true that a basic OLS estimator will never be consistent with a DPD
model, but the within estimator is not a basic OLS estimator. As noted
by Arellano and Bover (1995) or Alvarez and Arellano (2003), the within
estimator is equivalent to OLS on a model transformed by orthogonal
deviations. To find out whether -xtivreg,fe- is consistent in your case,
check out Anderson-Hsiao (1981) and Alvarez-Arellano (2003).  

Sorry about the confusion.

Just another point:

Martin Mathes wrote:

>However, I'd like to run a fixed effects-estimation and xtabond is, at
least as far as I have understood, a random >effects-estimator.

The point that I wanted to make in my previous post is that the
Arellano-Bond estimator deals with the individual effect in exactly the
same way as the within "fixed effect" estimator: by getting rid of it.
As noted by Wooldridge in "Econometric Analysis of Cross Section and
Panel Data", the important distinction is not so much between "random"
and "fixed". The important issue is the correlation between the
individual effect and the regressors. Both the within estimator and the
Arellano-Bond estimator can deal with an individual effect that is
random a random variable correlated with the regressors.

References:

- Alvarez and Arellano (2003), "The time-series and cross-section
asymptotics of dynamic panel data estimators", Econometrica.
- Anderson and Hsiao (1981), "Estimation of dynamic models with error
components".
- Arellano and Bover (1995), "Another look at the instrumental variable
estimation of error-components models", Journal of Econometrics.

Jean Salvati

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