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st: xtabond2: interpretation

From   "V. Sarafidis" <[email protected]>
To   [email protected]
Subject   st: xtabond2: interpretation
Date   25 Jul 2005 16:28:07 +0100

For the GMM experts:

I am using xtabond2 to estimate a dynamic panel (N=5,500 and T=12) using either the GMM in first-differences (GMM-fd) or the system GMM (GMM-s).

With such a short time series and a large cross-sectional dimension, I would expect the GMM to do well over the downward biased fixed effects estimator (FE). However, it appears that the autoregressive estimated coefficient in GMM-fd is much more downward biased than FE. The GMM-s does better than GMM-fd but still gives estimation values which are not significantly different from FE.

Notice that to enhance consistency in estimation I make sure I use in each model the appropriate lagged values for the instruments, as dictated by the Arellano-Bond test for serial correlation in the disturbances, which is reported with xtabond2.

Is this a puzzle or am I doing something obviously wrong?
Many thanks in advance for any help I can get.

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