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# Re: st: Interaction Variables with regards to xtabond2

 From Austin Nichols To statalist@hsphsun2.harvard.edu Subject Re: st: Interaction Variables with regards to xtabond2 Date Tue, 30 Oct 2012 10:38:25 -0400

```john ebireri <jebireri@yahoo.com>
If x is endogenous and z is exogenous, xz is endogenous.

On Tue, Oct 30, 2012 at 6:53 AM, john ebireri <jebireri@yahoo.com> wrote:
> Hello,
>
> I am estimating the following panel-data model by system GMM:
>
> y(i, j, t) = a0*y(i, j, t-1) + a1*x(j, t) + a2*x(j, t)*z(i, t) + ...
>
> where the dependent variable y is the growth of value added in manufacturing sector i in country j; x is a country-level explanatory variable of interest; z is a variable measuring a characteristic of manufacturing sectors (which may be common across countries). x is a weakly endogenous variable; z is exogenous. Therefore, x is included in the gmm statement, while z is in the iv statement.
>
> My query is whether the interaction variable x*z should appear in the gmm or the iv statement. I have tried both and it makes a difference. Specifically, the significance of control variables is unaffected by the location of variable x*z; the significance of a1 - i.e., the coefficient of x - is also almost unchanged (it sometimes shows a small drop when x*z is in the gmm statement) but a2 - i.e., the coefficient of x*z - is always insignificant when x*z is in the gmm statement and always significant when x*z is in the iv statement. No misspecification is detected in either case.
>
> I would appreciate any advice. Thank you.
>
> John.

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