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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
Aarhus university, Denmark
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