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Re: st: Is xtivreg2 appropriate with a small dynamic panel?


From   Austin Nichols <austinnichols@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Is xtivreg2 appropriate with a small dynamic panel?
Date   Thu, 6 Aug 2009 12:29:33 -0400

Steve Doogue <steve.doogue@gmail.com>:
This dataset is likely too small for any IV approach to be useful, and
you could verify that yourself with a quick simulation.

On Thu, Aug 6, 2009 at 9:05 AM, Steve Doogue<steve.doogue@gmail.com> wrote:
> 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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