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st: Estimated regressors and GMM

From   "Tsatsaronis, Konstantinos" <>
To   "" <>
Subject   st: Estimated regressors and GMM
Date   Sun, 23 Oct 2011 16:06:53 +0200

I am having trouble in estimating by stacked GMM a model with generated regressors. I checked through past postings and FAQs but I was not too successful. I was wondering if anyone could offer a helpful tip.

Here is the issue. I am estimating the following regression:

y = c0 + c1*W + c2*u_hat + e

where u_hat is the residual from a previous regression

x = b0 + b1*Z + u

Using u_hat in the regression messes up the inference of the c's so following McFadden and Newey's
chapter in the Handbook of Econometrics I tried stacking the two sets of moments conditions and estimating a GMM.
I have only used "canned" versions of GMM before in other software, but this is the first time
I have to be more explicit about it. I admit that I am not starting this with the greatest degree of confidence in my skill...

Here is one of my attempts to set it up:

gmm (eq1: x - {b0} - {xb:Z1 Z2}) (eq2: y - {c0} - {c2}*(x - {b0} - {yb:Z1 Z2}) - {cw:W1 W2 W3}), inst(Z1 Z2)

STATA complains variously about the weighting matrix not being positive definite, about the instrument list etc.

I realise that I am doing something fundamentally wrong but I cannot seem to get the grip of the GMM command.

Any ideas of what I am doing wrong, or how I can deal with this problem in a different way,
would be greatly appreciated.

Kostas Tsatsaronis


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