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st: Is xtivreg2 appropriate with a small dynamic panel?


From   Steve Doogue <steve.doogue@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   st: Is xtivreg2 appropriate with a small dynamic panel?
Date   Thu, 6 Aug 2009 14:05:39 +0100

Hello all,

Grateful for your help on the following. I’m new to STATA and an
econometric rookie, so please bear with me.

I am working with macroeconomic data for which T = 17 and N = 4 (four
countries, over 1990-2006), and want to know whether the xtivreg2
command is appropriate for this panel size.

The model I am looking at will be dynamic with a lag of the dependent
variable on the right hand side.

I suspect endogeneity of one of my explanatory variables, so want to
use an instrumental variable approach. I don’t want to use the
Arellano-Bond (AB) GMM estimator, which I understand is bias when T is
small: Judson and Owen (1996) for example find significant bias using
the AB estimator even when T=30. A natural candidate seems to be the
xtivreg2 (fixed effects) set of commands which (a) allows for
endogeneity to be addressed (via the IV) and (b) account for
country-specific effects. My question, then, is how well suited are
the xtivreg2 commands to a panel data of the dimensions I describe (T
= 17, N = 4)?

If I have interpreted the paper by Alvarez and Arrellano (2003)
correctly, the bias of the fixed effect estimator is of the order 1/T
(however, this is as N approaches infinitiy).

Many thanks for your help,

Steve.
(London)

References:
- Alvarez and Arrelano, 2003, The Time Series and Cross-section
Asymptotics of Dynamic Panel Data Estimators,  Econometrica, July
2003.
- Judson and Owen, 1996, Estimating Dynamic Panel Data Models: A
Practical Guide for Macroeconomists.

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