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st: Re: number of lags

From   Kit Baum <>
To   "alessia matano" <>
Subject   st: Re: number of lags
Date   Mon, 28 May 2007 06:49:51 -0400

The logic here is the same as underlying Arellano-Bond. If the errors are AR(1), then they are correlated with y_t-1, and if the model is correct, they are correlated with x_t-1, so that the minimum lag is 2. Calculating a robust (or cluster-robust) covariance matrix does not change how the coefficients are calculated: if the instruments are not orthogonal to the error, the IV estimates will not be consistent. But if 2-period lags are appropriate, so are 3-period lags, 4-period lags, etc. so there is no reason why the equation should be exactly identified: you can use several lags of the x variables.

Kit Baum, Boston College Economics and DIW Berlin
An Introduction to Modern Econometrics Using Stata:

On May 28, 2007, at 5:39 AM, alessia matano wrote:

Dear Kit,

I am estimating an IV using lagged values of my independent variables
as instruments. if I know that the erros are AR(1), the minimum lag I
have to start is 2, or if I put robust cluster(id) is can use also
The equation is exactly identified, so I can not test the validity of

Thank you

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