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st: Interdependent panel system


From   [email protected]
To   [email protected]
Subject   st: Interdependent panel system
Date   Thu, 04 Sep 2008 11:48:31 +0200

Hello everyone,

I have a small N,  large T panel data set and I would like to estimate the price elasticity of demand.

My system reads:

(1) p(i,t) = a0(i) + a1*p(i,t-1) + u(i,t)
(2) q(i,t) = b0(i) + b1*p(i,t) + v(i,t)

Hence, my question is: Which estimation procedure is appropriate, given that p(i,t) is endogeneous in equation (2) and depends on its own lag in equation (1)? Furthermore, are standard panel techniques applicable - my panel is NOT large N, small T but vice versa?

I'm only interested in the parameter b1 (variables are in logs, thus b1 is the price elasticity of demand). Can I estimate (2) without respect to the endogeneity of p(i,t) with say xtreg?

Many thanks in advance for your comments!
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