Re: RE: st: predetermined variables with xtabond2

["Justina Fischer" <JAVFischer@gmx.de>]

Hi

not being an expert, you appear to have to decide whether you estimate first differences or not. First differences (al a Dy = da + db + e2)  lead to endogeneity of otherwise exogenous (instrumental) variables if you estimated levels instead (y = a +b + + e1).

I think this is what the quote says.

Best

Justina
-------- Original-Nachricht --------
> Datum: Fri, 15 Jun 2012 21:15:11 +0200
> Von: "Søren Møller-Larsson" <soren_ml@hotmail.com>
> An: statalist@hsphsun2.harvard.edu
> Betreff: RE: st: predetermined variables with xtabond2

> 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: sroy2138@gmail.com
> > To: statalist@hsphsun2.harvard.edu
> >
> > 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,
> > Suryadipta.
> >
> > On Sun, May 27, 2012 at 10:37 AM, Søren Møller-Larsson
> > <soren_ml@hotmail.com> wrote:
> > > Dear Suryadipta
> > >
> > > 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: sroy2138@gmail.com
> > >> To: statalist@hsphsun2.harvard.edu
> > >>
> > >> 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,
> > >> Suryadipta.
> > >>
> > >> On Sat, May 26, 2012 at 4:49 AM, Søren Møller-Larsson
> > >> <soren_ml@hotmail.com> 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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-- 
Justina AV Fischer, PhD
COFIT Fellow
World Trade Institute
University of Bern

homepage: http://www.justinaavfischer.de/
e-mail: javfischer@gmx.de. justina.fischer@wti.org
papers: http://ideas.repec.org/e/pfi55.html


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