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st: RE: xtabond2 : dropping variables due to collinearity


From   Nick Cox <n.j.cox@durham.ac.uk>
To   "'statalist@hsphsun2.harvard.edu'" <statalist@hsphsun2.harvard.edu>
Subject   st: RE: xtabond2 : dropping variables due to collinearity
Date   Fri, 4 May 2012 13:31:40 +0100

The trick is to realise that this is good news. The signal is that you can -- indeed must -- choose a simpler model. Which variable(s) to omit is a matter for your economic judgement. 

Nick 
n.j.cox@durham.ac.uk 

john ebireri

I have this problem where stata drops some of my variables due to collinearity when using xtabond2.

The problem occurs when I introduce gdp to the model. The variables that get dropped due to collinearity are the lagged dependent variable-manufacturing value added/gdp, extrade-manufactured exports/gdp and inv-gross domestic investment/gdp.  Any suggestions or solution please? I will show the results of both models: 


. xtabond2 manvaad l.manvaad bcon fbank gbank bnkdev extrade govexp inv, gmmstyle(l.manvaad bcon fbank gbank, laglimits(2 1) collapse) ivstyle(bnkdev extrade govexp inv, equation(level)) robust twostep
Favoring space over speed. To switch, type or click on mata: mata set matafavor speed, perm.

[details omitted] 

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