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# st: predetermined variables with xtabond2

 From Søren Møller-Larsson To Subject st: predetermined variables with xtabond2 Date Sat, 26 May 2012 10:49:00 +0200

```Dear all

in the Stata help file of xtabond2 it reads the following:
"
y_it = x_it * b_1 + w_it * b_2 + u_it  ...

x_it is a vector of strictly exogenous covariates (ones dependent on
neither current nor past e_it);

w_it is a vector of predetermined covariates (which may include the lag of
y) and endogenous covariates, all of which may be correlated with
the v_i (Predetermined variables are potentially correlated with
past errors.  Endogenous ones are potentially correlated with past
and present errors.);
"
So to me it looks like predetermined variables are part of the gmmstyle() instruments.

However further down the text it is explained how predetermined variables are treated in the ivstyle() instrument matrix:

..."equation() is useful for proper handling of predetermined variables
used as IV-style instruments in system GMM.  For example, if x is
predetermined, it is a valid instrument for the levels equation since
it is assumed to be uncorrelated with the contemporaneous error term.
However, x becomes endogenous in first differences, so D.x is not a
valid instrument for the transformed equation.  ivstyle(x) would
therefore be inappropriate.  The use of x as an IV-style instrument in
levels only could be specified by iv(x, eq(level))."

So my question is, when do I use gmm(h, laglimits(1 .)) and when do I use iv(h, equation(level)) for predetermined h, and what is the difference?

Kind regard
Soren
Aarhus university, Denmark

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```