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


From   Edlira Narazani <narazani@econ.unito.it>
To   statalist@hsphsun2.harvard.edu
Subject   RE: Macoreconometric dynamic panels (was: Re: st: panel autocorrelation)
Date   Tue, 19 Oct 2004 12:06:18 +0200

Jean
Thank you

Scrive "Salvati, Jean" <JSalvati@imf.org>:

> 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
>
>
> > -----Original Message-----
> > From: owner-statalist@hsphsun2.harvard.edu
> > [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of
> > Salvati, Jean
> > Sent: Monday, October 18, 2004 11:31 AM
> > To: statalist@hsphsun2.harvard.edu
> > Subject: RE: Macoreconometric dynamic panels (was: Re: st:
> > panel autocorrelation)
> >
> > Hi Martin,
> >
> > A few remarks:
> >
> > - 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- :)
> >
> > - The Anderson-Hsiao estimator is consistent for T->infty,
> > N->infty, or both. Unfortunately, the -xtivreg, fd-
> > implementation of this estimator cannot be used for inference
> > and hypothesis testing. The problem is that the
> > Anderson-Hsiao (or Arellano-Bond, for that matter)
> > orthogonality conditions involving lags of the dependent
> > variable are only valid when the error term in the levels
> > equation is not serially correlated. However, when the error
> > term in the levels equation is not serially correlated, the
> > error term in the first-difference equation exhibits negative
> > first-order autocorrelation. Unfortunately, the
> > Anderson-Hsiao estimator relies on the first-difference
> > equation, and -xtivreg, fd- does not report robust standard
> > deviations for the coefficients.
> >
> > - The Arellano-Bond GMM estimator is a random-effect
> > estimator in the sense that the individual effect is treated
> > as a random variable. However, like the "within fixed effect"
> > estimator implemented in -xtivreg, fe-, the Arellano-Bond
> > estimator is perfectly valid when the individual effect is
> > correlated with some of the regressors (or even all the
> > regressors). Any estimator that relies on first-differencing
> > or orthogonal deviations can cope with the correlation
> > between the individual effect and the regressors. In
> > contrast, the estimators implemented in -xtivreg, re- are not
> > valid when the individual effect is correlated with some of
> > the regressors.
> >
> > - As I said in my response to Edlira, additional consistency
> > results for the GMM DPD estimators are provided in the recent
> > paper by Alvarez and Arellano (2003), "The time-series and
> > cross-section asymptotics of dynamic panel data estimators",
> > Econometrica, July. Check it out. You might be happily surprised :)
> >
> > Jean Salvati
> > Econometric Support
> > (202) 623-7804
> > IS 12-1328
> >
> >
> > > -----Original Message-----
> > > From: owner-statalist@hsphsun2.harvard.edu
> > > [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Martin
> > > Mathes
> > > Sent: Sunday, October 17, 2004 12:57 PM
> > > To: statalist@hsphsun2.harvard.edu
> > > Subject: Macoreconometric dynamic panels (was: Re: st: panel
> > > autocorrelation)
> > >
> > > 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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> > >
> > >
> >
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> >
> >
>
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