Part 9: GMM Estimation [ 1/57]
Econometric Analysis of Panel Data
William Greene
Department of Economics
Stern School of Business
Part 9: GMM Estimation [ 2/57]
http://people.stern.nyu.edu/wgreene/CumulantInstruments-Racicot-AE(2014)_46(10).pdf
Part 9: GMM Estimation [ 3/57]
Part 9: GMM Estimation [ 4/57]
The NYU
No Action
Letter
Part 9: GMM Estimation [ 5/57]
Part 9: GMM Estimation [ 6/57]
GMM Estimation for One Equation
1 N
1 N
g
( )= i1z i (yi x
i1z i i
i )
N
N
1 Ni1i2zizi
1 Ni1ei2zi zi
Asy.Var[g
( )]
, estimated with
N
N
N
N
based on 2SLS residuals e.i The GMM estimator then minimizes
1 e z z
1 N
i ) '
i1zi (yi x
N
N
N
N
2
i1 i i i
1 N
z
(y
x
)
i .
N i1 i i
Part 9: GMM Estimation [ 7/57]
GMM for a System of Equations
Simultaneous equations
Labor supply
h h h
hours = f(wage, gh ) h= x
w
wage = f(hours, gw ) w= x
Product market equilibrium
Quantity demanded = f(Price,...)
Price = f(market demand,...)
General format:
y1= x
1 1 1
2
y2= x
...
M
yM= x
Part 9: GMM Estimation [ 8/57]
SUR Model with Endogenous
RHS Variables
SUR System
x G ] 0
y1= x
1 1 1 , E[1 |x 1 ,x 2 ,...
2
y2= x
...
G
yM= x
2 ,...
G ,...
Each equation has a set of Lg Kg instruments, zg
Each equation can be fit by 2SLS, IV, GMM, as before.
Part 9: GMM Estimation [ 9/57]
GMM for the System - Notation
Index: i = 1,...,N for individuals
g = 1,...,G for equations (this would be t=1,...T for a panel)
Data matrices: G rows,
yi1
xi1 0
y
0 xi2
i2
yi
, Xi
...
... ...
yiG
0 0
K1 K2
yi X+
i
i
0
1
... 0
, = 2 , i =
...
... ...
iG
... x
G
... KG columns
...
i1
i2
...
iG
Part 9: GMM Estimation [ 10/57]
Instruments
zi1 0
0 zi2
Zi
... ...
0 0
L1
L2
... 0
... 0
, G rows (1 for each equation)
... ...
... xiG
... LG columns
Such that
E zi1i1
zi1,1i1
0
zi1,2i1
0
for L1 instrumental variables
...
...
i1,L1 i1
0
Same for zi2i2, ...
Part 9: GMM Estimation [ 11/57]
Moment Equations
zi1i1
z
i ] E i2 i2
E[Z
...
ziGiG
0 L1 rows
L rows
0 2
, for observation i
...
...
0 LG rows
Summing over i gives the orthogonality condition,
1 N
i E
i=1Z
zi1i1
0 L1
L
z
0 2
1 N i2 i2
i=1
...
...
N
0 LG
ziGiG
rows
rows
...
rows
Part 9: GMM Estimation [ 12/57]
Estimation-1
ig yig x
ig
For one equation,
= the minimizer of
M
m=1
(1/N)
N
i=1 ig,m
)
(yi xi
gg(g )'gg(g )
Leads to 2SLS
For all equations at the same time
= the minimizer of
G
g=1
g
'g
) g(
g( g
G
g=1
M
m=1
(1/N)
N
i=1 ig,m
(yi xi )
If the gs are all different, still equation by equation 2SLS
Part 9: GMM Estimation [ 13/57]
Estimation-2
Assuming ig are all uncorrelated, equation by equation GMM
1
ig
qg Ni1zig(yig x
N
)
g '
1 e z z 1 N
z
(y
) .
i1 ig
ig
ig g
N
N
2
i1 ig ig ig
For the system,
q = Gg=1qg
Cases to consider:
(1) Coefficient vectors have elements in common or are
restricted
(2) Disturbances are correlated.
Part 9: GMM Estimation [ 14/57]
Estimation-3
Combining GMM criteria
G
g 1
1 N
1 N
1
1 N 2
z
(y
x
)
'
z
z
iz1
ig g
i 1 ig ig ig
N i1 ig ig
N
N
Ni1zi1 (yi1 x
i1 1 ) Ni1i12 zi1zi1
0
N
N
2
z
(y
x
)
0
i 1 i2
i2
i2 2
i 1 i2zi2 zi2
q
'
...
...
...
N
z
(y
x
)
0
0
iG G
i1 iG iG
Ni1zi1 (yi1 x
i1 1 )
N
z
(y
x
)
i2 2
i1 i2 i2
...
N
z
(y
x
)
iG G
i1 iG iG
(y
ig
ig
ig g
)
...
0
...
0
...
...
... Ni1iG
ziGziG
Part 9: GMM Estimation [ 15/57]
Estimation-4
If disturbances are correlated across equations,
i1 1 )
Ni1zi1(yi1 x
z
(y
x
)
1
i1 i2
i2
i2 2
q
'
N
...
z
(y
x
)
i1 iG
iG
iG G
... Ni1i1iGzi1ziG
... Ni1i2iGzi2ziG
...
...
2
... Ni1iG
ziGziG
i1 1 )
Ni1zi1(yi1 x
N
i2 2 )
1 i1zi2 (yi2 x
N
...
iG G )
Ni1ziG (yiG x
Ni1i12 zi1zi1
Ni1i1i2zi1zi2
N
2
Ni1i2
zi2zi2
1 i1i2i1zi2zi1
N2
...
...
Ni1iGi1ziGzi1 Ni1iGi1ziGzi1
Part 9: GMM Estimation [ 16/57]
Estimation-5
If disturbances are correlated across equations,
G
G
(1/ N)Niz1
ig g) W gh
q g1 h1 (1/ N)Ni1zig (yig x
gh = the gh block of the inverse matrix
where W
z z
z z
N
z z
1 i1i2i1zi2zi1
N2
...
...
Ni1iGi1ziGzi1 Ni1iGi1ziGzi1
N 2
i1 i1 i1 i1
N
i1 i1 i2 i1 i2
N 2
i1 i2 i2 i2
... z z
... z z
...
...
N 2
... i1iGziGziG
N
i1 i1 iG i1 iG
N
i1 i2 iG i2 iG
ih
(yih x ih
h )
Part 9: GMM Estimation [ 17/57]
The Panel Data Case
is the same in every equation.
The number of moment equations is T L
if each moment equation is L per period,
E[zit it ] 0,
If every disturbance at time t is also orthogonal
to every set of instruments in every other period, s,
Then
E[zit is ] 0, TL per period, for T periods, or T 2L
E.g., L=10 instruments, T=5 periods, K=5 parameters,
250 moment equations (!) for fitting 5 parameters.
Part 9: GMM Estimation [ 18/57]
Hausman and Taylor FE/RE Model
it
yit x1
x2 it
i
z1
i
z2
it ui
E[ui | x1it ,z1i ] 0
E[ui | x2it ,z2i ] 0 OLS and GLS are inconsistent
Var[ui | x1it , x2it ,z1i ,z2i ] u2
E[it | x1it , x2it ,z1i ,z2i ]=0
Var[it | x1it , x2it ,z1i ,z2i ]=2
Cov[it ,ui | x1it , x2it ,z1i ,z2i ]=0
Var[it ui | x1it , x2it ,z1i ,z2i ]=2 u2
Cov[it ui , is ui | x1it , x2it ,z1i ,z2i ]=u2
Part 9: GMM Estimation [ 19/57]
Useful Result: LSDV is an IV Estimator
y X D
= X w
1
plim
Xw 0, so X is endogenous. Correlated with w because of D.
NT
MDX X* = x's in group mean deviations.
1
1
1
1
X*'w
X*' D+ =
XMDD XMD
X0 XMD
NT
NT
NT
NT
1
1
1
XMD, so plim
X*'w plim
XMD 0
NT
NT
NT
1
1
plim
X*'X plim
X'MDX within groups sums of squares 0.
NT
NT
X* is a valid instrument.
plim b*=plim X* ' X
X
* y =
Part 9: GMM Estimation [ 20/57]
Hausman and Taylor
it
yit x1
x2 it
i
z1
i
z2
it ui
Deviations from group means removes all time invariant variables
yit yi ( x1it - x1i )'1 ( x2it - x2i )'2 it
Implication: 1 , 2 are consistently estimated by LSDV.
( x1it - x1i ) = MDX1 = K1 instrumental variables
( x2it - x2i ) = MDX2 = K2 instrumental variables
z1i
?
= L1 instrumental variables (uncorrelated with u)
= L2 instrumental variables (where do we get them?)
H&T: x1i = (I -MD )X1 = K1 additional instrumental variables. Needs K1 L2.
Part 9: GMM Estimation [ 21/57]
H&Ts FGLS Estimator
(1) LSDV estimates of 1 , 2 , 2
(2) (e* )' = (e1 , e1 ,..., e1),(e2 , e2 ,..., e2 ),...,(eN, eN,..., eN )
(Ni=1Ti observations).
zi1 zi2
z z
i2
Ti rows, repeat invariant variables
Zi * i1
M M
L1 L2 columns
zi1 zi2
zi1 xi1,1
Ti rows, repeat zi1 , time varying xi1,t
z
x
i1,2
i1
Wi
L1 K1 columns
M
M
zi1 xi1,T i
Part 9: GMM Estimation [ 22/57]
H&Ts FGLS Estimator (cont.)
(2 cont.) IV regression of e * on Z* with instruments
Wi consistently
estimates
and
(3) With fixed T, residual variance in (2) estimates u2 2 / T
With unbalanced panel, it estimates u2 2 / T or something
resembling this. (1) provided an estimate of 2 so use the two
to obtain estimates of u2 and 2 . For each group, compute
2
2
2
i 1
/ (
Ti
u)
(4) Transform
[xit1 , xit2 ,zi1 ,zi2 ] to
W*
i = [xit1 , xit2 ,zi1 ,zi2 ] - i[xi1 , xi2 ,zi1 ,zi2 ]
and
yit to yit * = yit - iyi.
Part 9: GMM Estimation [ 23/57]
H&Ts 4 STEP IV Estimator
Instrumental Variables Vi
(x1it - x1i ) = K1 instrumental variables
(x2it - x2i ) = K2 instrumental variables
z1i
= L1 instrumental variables (uncorrelated with u)
x1i
= K1 additional instrumental variables.
Now do 2SLS of y * on W * with instruments V to estimate
all parameters. I.e.,
* W*
)-1W
* y * .
[1 , 2 , 1 , 2 ]=(W
Part 9: GMM Estimation [ 24/57]
Part 9: GMM Estimation [ 25/57]
Part 9: GMM Estimation [ 26/57]
Part 9: GMM Estimation [ 27/57]
Part 9: GMM Estimation [ 28/57]
Part 9: GMM Estimation [ 29/57]
Dynamic (Linear) Panel
Data (DPD) Models
Application
Bias in Conventional Estimation
Development of Consistent Estimators
Efficient GMM Estimators
Part 9: GMM Estimation [ 30/57]
Dynamic Linear Model
Balestra-Nerlove (1966), 36 States, 11 Years
Demand for Natural Gas
Structure
New Demand: G*i,t Gi,t (1 )Gi,t1
Demand Function G*i,t 1 2Pi,t 3Ni,t 4Ni,t 5Yi,t 6 Yi,t i,t
G=gas demand
N = population
P = price
Y = per capita income
Reduced Form
Gi,t 1 2Pi,t 3Ni,t 4Ni,t 5Yi,t 6 Yi,t 7Gi,t1 i i,t
Part 9: GMM Estimation [ 31/57]
A General DPD model
i,t yi,t1 ci i,t
yi,t x
E[i,t | Xi ,ci ] 0
2
E[i,t
| Xi , ci ] 2 , E[i,ti,s | Xi , ci ] 0 if t s.
E[ci | Xi ] g( Xi )
No correlation across individuals
Part 9: GMM Estimation [ 32/57]
OLS and GLS are inconsistent
i,t yi,t1 ci i,t
yi,t x
Cov[yi,t1 ,(ci i,t )]
2c Cov[yi,t2 ,(ci i,t )]
If T were large and -1<<1,
2c
this would approach
1
I mplication : Both OLS and GLS are
inconsistent.
Part 9: GMM Estimation [ 33/57]
LSDV is Inconsistent
[(Steven) Nickell Bias]
yi,t yi ( xi,t xi )'+(yi,t1 yi ) (i,t i )
2 (T 1) T T
Cov[(yi,t1 yi ),(i,t i )] 2
T
(1 )2
Large when T is moderate or small.
Proportional bias for conventional T (5 - 15), is
on the order of 15% - 60% .
Part 9: GMM Estimation [ 34/57]
Anderson Hsiao IV Estimator
Base on first differences
yi,t yi,t1 (xi,t xi,t1)'+(yi,t1 yi,t2 ) (i,t i,t1 )
Instrumental variables
yi,3 yi,2 (xi,3 xi,2 )'+(yi,2 yi,1) (i,3 i,2 )
Can use yi1
yi,4 yi,3 ( xi,4 xi,3 )'+(yi,3 yi,2 ) (i,4 i,3 )
Can use yi2 or (yi,2 yi,1)
And so on.
Levels or lagged differences?
Levels allow you to use more data
Asymptotic variance of the estimator is smaller with levels.
Part 9: GMM Estimation [ 35/57]
Arellano and Bond Estimator - 1
Base on first differences
yi,t yi,t1 ( xi,t xi,t1 )'+(yi,t1 yi,t2 ) (i,t i,t1 )
Instrumental variables
yi,3 yi,2 ( xi,3 xi,2 )'+(yi,2 yi,1) (i,3 i,2 )
Can use yi1
yi,4 yi,3 ( xi,4 xi,3 )'+(yi,3 yi,2 ) (i,4 i,3 )
Can use yi,1 and yi2
yi,5 yi,4 ( xi,5 xi,4 )'+(yi,4 yi,3) (i,5 i,4 )
Can use yi,1 and yi2 and yi,3
Part 9: GMM Estimation [ 36/57]
Arellano and Bond Estimator - 2
More instrumental variables - Predetermined X
yi,3 yi,2 ( xi,3 xi,2 )'+(yi,2 yi,1 ) (i,3 i,2 )
Can use yi1 and xi,1 , xi,2
yi,4 yi,3 ( xi,4 xi,3 )'+(yi,3 yi,2 ) (i,4 i,3 )
Can use yi,1 , yi2 , xi,1 , xi,2 , xi,3
yi,5 yi,4 ( xi,5 xi,4 )'+(yi,4 yi,3 ) (i,5 i,4 )
Can use yi,1 , yi2 , yi,3 , xi,1 , xi,2 , xi,3 , xi,4
Part 9: GMM Estimation [ 37/57]
Arellano and Bond Estimator - 3
Even more instrumental variables - Strictly exogenous X
yi,3 yi,2 ( xi,3 xi,2 )'+(yi,2 yi,1 ) (i,3 i,2 )
Can use yi1 and xi,1 , xi,2 ,..., xi, T (all periods)
yi,4 yi,3 ( xi,4 xi,3 )'+(yi,3 yi,2 ) (i,4 i, 3 )
Can use yi,1 , yi2 , xi,1 , xi,2 ,..., xi, T
yi,5 yi,4 ( xi,5 xi,4 )'+(yi,4 yi,3 ) (i,5 i,4 )
Can use yi,1 , yi2 , yi,3 , xi,1 , xi,2 ,..., xi, T
The number of potential instruments is huge.
These define the rows of Zi . These can be used for
simple instrumental variable estimation.
Part 9: GMM Estimation [ 38/57]
Instrumental Variables
Predetermined variables
, xi,2
yi,1 , xi,1
Zi
...
, xi,2
, xi,3
...
yi,1 , yi,2 , xi,1
...
0
...
...
, xi,2
,...xi, T 1
... yi,1 , yi,2 ,..., yi, T 2 , xi,1
...
0
(T rows)
Strictly Exogenous variables
, xi,2
,...xi, T 1
yi,1 , xi,1
Zi
...
0
...
, xi,2
,...xi, T 1 ...
yi,1 , yi,2 , xi,1
0
...
0
...
...
, xi,2
,...xi, T 1
... yi,1 , yi,2 ,..., yi, T 2 , xi,1
(T rows)
Part 9: GMM Estimation [ 39/57]
Simple IV Estimation
= N XZ N ZZ 1 N ZX
i=1 i i
i=1 i i
i=1 i i
N XZ N ZZ 1 N Zy
i=1 i i
i=1 i i
i=1 i i
This is two stage least squares.
N
N
]=
Est.Asy.Var[
i=1 XiZi i=1ZiZi
N
i=1
ZiXi
(y y )]2
Ni1 tT 3[( yi, t yi, t 1 ) ( xi, t xi, t 1 )'
i, t
i, t 1
Ni1 (Ti 2)
Note that this variance estimator understates the true asymptotic
variance because observations are autocorrelated for one period.
(yi,t yi, t 1 ) ... (i, t i, t 1 ) ... vi, t
Cov[vi,t , vi,t 1 ] [vi,t , vi, t 1 ] 2 (0 for longer lags, and leads)
Use a "White" robust estimator
]= N XZ N Zv
Est.Asy.Var[
i=1 i i vi Zi
i=1 i i
N
i=1
ZiXi
Part 9: GMM Estimation [ 40/57]
Arellano/Bond
First Difference Formulation
yi, t 1 it
yit x
it
Parameters : =
[ , ]
The data
xi3
yi3
xi4
i4
yi
, Xi
...
M
iT i
xiT
K
yi,2 yi,1
yi,3 yi,2
, Ti -2 rows
yi,T yi, T1
1
columns
Part 9: GMM Estimation [ 41/57]
Arellano/Bond - GLS
yi,t yi,t1 ( xi,t xi,t1)'+(yi,t1 yi,t2 ) (i,t i )
i,3 i,2
Cov
2 1 0 ...
1 2 1 ...
0 1 2 ...
i,4 i,3
i,5 i,4
...
i,T i,T 1
...
...
0
0
0 2 i
1 ... 1
... 1 2
Part 9: GMM Estimation [ 42/57]
Arellano/Bond GLS Estimator
Ni=1ZiXi
Ni=1Z iy i
= N XZ N Z Z
i=1 i i i
i=1 i i
N XZ N Z
i iZ i
i=1
i
i
i=1
Z X
= XZ ZZ
X Z Z Z Z y
Part 9: GMM Estimation [ 43/57]
GMM Estimator
yi,t xi,t'+yi,t1 i,t
We make no assumptions about the disturbance. In first differences
yi,t yi,t1 ( xi,t xi,t1 )'+(yi,t1 yi,t2 ) (i,t i,t1)
(1) Two stage least squares
= N XZ N ZZ
i=1 i i
i=1 i i
Zi Xi
N
i=1
N
i=1
XiZi Ni=1ZiZi
1 Ni=1Ziv
(2) Form the weighting matrix for GMM: W
v
Z
i i
i
N2
The criterion for GMM estimation is
1
-1
1 N
q= Ni=1 viZ
W
i=1Zi vi
i
1 Ni=1ZiXi
N
GMM = i=1 XiZi W
N
i=1
1 Ni=1Ziy i
XiZi W
1 Ni=1Zi Xi
N
Est.Asy.Var[
GMM ] i=1 XiZi W
Zi y i
N
i=1
Part 9: GMM Estimation [ 44/57]
Arellano/Bond/Bovers Formulation
Start with H&T
it
yit x1
x2 it
i
z1
i
z2
it ui
Instrumental variables for period t
( x1it - x1i ) = K1 instrumental variables
( x2it - x2i ) = K2 instrumental variables
z1i
= L1 instrumental variables (uncorrelated with u)
x1i
= K1 additional instrumental variables. K1 L2.
Let vit it ui
Let zit [( x1it - x1i )',( x2it - x2i )',z1i , x1']
Then E[zit vit ] 0
We formulate this for the Ti observations in group i.
Part 9: GMM Estimation [ 45/57]
Arellano/Bond/Bovers Formulation
Dynamic Model
it
yit yi,t1+x1
x2 it
i
z1
i
z2
it ui
Parameters : = [, 1
, 2
, 1
, 2']
The data
yi,2
yi,1 x1i2 x2i2 z1i z2 i
y
y
x1
x2
z1
z2
i3
i3
i
i,3
i,2
i
yi
, Xi
, Ti -1 rows
yi,T i
yi,T-1 x1iTi x2iTi z1i z2 i
1 K1
K2
L1 L2 columns
Part 9: GMM Estimation [ 46/57]
Arellano/Bond/Bovers Formulation
it
yit yi,t1 + x1
x2 it
i
z1
i
z2
it ui
Instrumental variables for period t as developed above
Let zit [yi,1 , yi,2 ,...,( x1it - x1i )',( x2it - x2i )',z1i , x1']
Combine H&T treatment with DPD GMM estimator.
Instrumental variable creation is based on group mean
deviation rather than first differences.
Part 9: GMM Estimation [ 47/57]
Arellano/Bond/Bovers Formulation
zit [yi,1 yi ,..., yi,t1 yi ,( x1it - x1i )',( x2it - x2i )',z1i , x1']
Then E[zit vit ] 0
We formulate this for the last Ti -1 observations in group i.
(yi,1 , x1i2 ,x2i2 ,z1i )
(0,0,0)
(0,0,0)
...
(0,0,0)
(0,0,0)
(0,0,0)
...
(0,0,0)
Zi
(yi,1 , yi,2 , x1i3 ,x2i3 ,z1i )
(0,0,0)
(0,0,0)
(0,0,0)
(0,0,0)
(yi,1 , yi,2 , yi,3 , x1i4 ,x2i,4 ,z1i ) ...
(0,0,0)
(0,0,0)
(0,0,0)
(0,0,0)
(0,0,0)
... (yi,1 ,...,yi,T-2 , x1i,(T-1) ,x2i,(T-1) ,z1i )
(0,0,0)
(0,0,0)
(0,0,0)
...
H'i MiD,(T -1)
i
(0,0,0)
(yi,1 ,...,yi,T-1 ,z1, x1i )
1/(Ti 1)
1/(Ti 1)
, where MiD,(T -1) MDi without the last column.
i
...
1/(Ti 1)
These blocks may contain all
previous exogenous variables, or all
exogenous variables for all periods.
This may contain the all periods of data on x1 rather than just the group mean. (Amemiya and
MaCurdy).
Part 9: GMM Estimation [ 48/57]
Arellano/Bond/Bovers Formulation
For unbalanced panels the number of
columns for Zi varies. Given the form of
Zi, the number of columns depends on Ti.
We need all Zi to have the same number
of columns. For matrices with less
columns than the largest one, extra
columns of zeros are added.
Part 9: GMM Estimation [ 49/57]
Arellano/Bond/Bovers Formulation
The covariance matrix defines the model:
i=2 I - Classical (pooled) regression model (no effects)
i=2 I + u2ii' - Random effects model
i= A positive definite TxT
i
i matrix - GR model
Part 9: GMM Estimation [ 50/57]
Arellano/Bond/Bover Estimator
= N X H Z N Z H
H Z
i=1
i
i
i
i=1
i
i
i
i
i
N
N
H Z
i Hi
X
H
Z
Z
i=1
i
i
i
i=1
i
i
i
Two step (GMM) estimation
Zi Hi Xi
Ni=1 Zi Hi yi
N
i=1
= I . Compute residuals v
i yi Xi
(1) Use
i
= 1 N Hv
Then HH
i i i
i1 i iv iHi
N
.
(2) Recompute
]= N X H Z N Z H
H Z
Est.Asy.Var[
i=1
i
i
i
i=1
i
i
i
i
i
Zi Hi Xi
N
i=1
Part 9: GMM Estimation [ 51/57]
GMM Criterion
The GMM criterion which produces this estimator is
H Z
i i Zi Hi
iHZ
q= v
i
i
i
N
i1
N
i=1
i i i
ZHv
Post estimation, use this as 2[DF] to test the overidentifying
restrictions. The degrees of freedom is the total number of
moment conditions (columns in Z) minus the number of
parameters in .
Part 9: GMM Estimation [ 52/57]
Application: Maquiladora
Part 9: GMM Estimation [ 53/57]
Maquiladora
Part 9: GMM Estimation [ 54/57]
Part 9: GMM Estimation [ 55/57]
Side Issue
How does y(t) = 1.220175 y(t-1) - 0.262198 y(t-2) + a behave?
y(t) = 1.220175 y(t-1) + a
is obviously explosive.
1.220175 0.262198
How to tell: A =
1
0
Smallest (possibly complex) root must be greater than 1.0.
Part 9: GMM Estimation [ 56/57]
Postscript
There is no theoretical guidance on the
instrument set
There is no theoretical guidance on the form of
the covariance matrix
There is no theoretical guidance on the
number of lags at any level of the model
There is no theoretical guidance on the form of
the exogeneity and it is not testable.
Results vary wildly with small variations in the
assumptions.
Part 9: GMM Estimation [ 57/57]
Ahn and Schmidt
it
yit yi,t1+x1
x2 it
i
z1
i
z2
it ui
There are (huge numbers of) additional moments.
i,0+ i,0
(1) Initial condition, yi,0 x
E[i,t yi,0 ] 0 implies T more estimating equations
(2) Uncorrelatedness with differences,
E[yis (it i,t1 )] 0, t 2,..., T, s 0,..., T 2 is
T(T-1)/2 conditions
(3) (Nonlinear)
E[iT (it i,t1 )] 0 implies T-2 restrictions.
And so on.
Even moderately sized models embed potentially
thousands of such estimating equations for usually
very small numbers (say 5 or 10) parameters.
How much efficiency can be gained? Is there a cost?
