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# RE: st: predetermined variables with xtabond2

 From Søren Møller-Larsson <[email protected]> To <[email protected]> Subject RE: st: predetermined variables with xtabond2 Date Fri, 15 Jun 2012 21:15:11 +0200

```Dear all

I have put this question forward ones before as seen below, but I still do not quite understand.

Looking at the user-written Stata command -xtabond2- with the two-stage system gmm option. Considering treatment of a predetermined independent variable call it x. I have read the "How to Xtabond..." by Roodman (2009).

Standard treatment is the gmm(x, laglimit(1 .)) option with lag 1 and longer.

Now looking at the -xtabond2- help-file in Stata it reads the following:

"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 is this a special case for predetermined variables? Can anybody explain when to use the iv(x, eq(level)) for predetermined variables?

Thank you and enjoy the weekend.

Regards Soren
Aarhus university

----------------------------------------
> Date: Mon, 28 May 2012 09:30:53 -0400
> Subject: Re: st: predetermined variables with xtabond2
> From: [email protected]
> To: [email protected]
>
> Dear Soren,
> I believe that you have got it right. pp.124 of the paper contains the
> relevant information to your question. The iv( . ) option is for
> strictly exogenous regressors, while the gmm( . ) option is for
> predtermined or suspected endogenous variables. Thus, e.g.
>
> " If w1 is strictly exogenous, w2 is predetermined but not strictly
> exogenous, and w3 is endogenous, then
> - xtabond2 y L.y w1 w2 w3 i.t, gmmstyle(L.y w2 L.w3) ivstyle(i.t w1)
> twostep robust small orthogonal -
> would fit the model with the standard choices of instruments—here with
> two-step system GMM, Windmeijer-corrected standard errors,
> small-sample adjustments, and orthogonal deviations." (pp. 127)
>
> The - lag - option is helpful for controlling the number of
> instruments- another issue of significance that has also been
> discussed by Roodman in his other paper (Roodman, D. M. 2009. A note
> on the theme of too many instruments. Oxford Bulletin
> of Economics and Statistics 71: 135–158).
>
> Overall, I believe that you are on track!
>
> Best wishes,
>
> On Sun, May 27, 2012 at 10:37 AM, Søren Møller-Larsson
> <[email protected]> wrote:
> >
> > Thanks you for your answer. Yes I did indeed. I am aware that the standard treatment of predetermined variables in system GMM is gmmstyle() and to use lags 1 and longer. Please correct me if I am wrong. In "how to xtabond2.." (2009) p. 124 it reads:
> >
> >
> >
> >
> >
> >
> >
> >
> >                "ivstyle() also generates one column per variable in System
> > GMM, following (26). The patterns in (27) can be requested using the equation suboption, as in: iv(w1
> > w2, eq(level)) and the compound iv(w1 w2, eq(diff)) iv(w1 w2, eq(level))."
> > So is it just two different methods to treat predetermined variables? If so is there a reason to use one over the other
> > Thanks againRegards
> > Soren
> >
> >
> >
> >
> > ----------------------------------------
> >> Date: Sun, 27 May 2012 10:10:30 -0400
> >> Subject: Re: st: predetermined variables with xtabond2
> >> From: [email protected]
> >> To: [email protected]
> >>
> >> Soren,
> >> Did you read the following paper (The Stata Journal Volume 9 Number 1:
> >> pp. 86-136) from the author of this code:
> >> http://www.stata-journal.com/article.html?article=st0159
> >>
> >> I believe that you wil get the answers to your queries in the paper.
> >>
> >> Best wishes,
> >>
> >> On Sat, May 26, 2012 at 4:49 AM, Søren Møller-Larsson
> >> <[email protected]> wrote:
> >> > 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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```