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GMM ESTIMATION FOR DYNAMIC PANELS WITH FIXED EFFECTS AND STRONG INSTRUMENTS AT UNITY

Published online by Cambridge University Press:  19 June 2009

Chirok Han  and
Peter C. B. Phillips
Chirok Han*
Affiliation:
Korea University
Peter C. B. Phillips*
Affiliation:
Yale University, University of Auckland, University of York, and Singapore Management University
*
†Chirok Han, Department of Economics, Korea University, Anam-dong, Seongbuk-gu, Korea; e-mail: chirokhan@korea.ac.kr.
*Address correspondence to Peter C.B. Phillips, Cowles Foundation, Yale University, P.O. Box 208281, New Haven, CT 06520, USA; e-mail: peter.phillips@yale.edu
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Abstract

This paper develops new estimation and inference procedures for dynamic panel data models with fixed effects and incidental trends. A simple consistent GMM estimation method is proposed that avoids the weak moment condition problem that is known to affect conventional GMM estimation when the autoregressive coefficient (ρ) is near unity. In both panel and time series cases, the estimator has standard Gaussian asymptotics for all values of ρ ∈ (−1, 1] irrespective of how the composite cross-section and time series sample sizes pass to infinity. Simulations reveal that the estimator has little bias even in very small samples. The approach is applied to panel unit root testing.

Type
ARTICLES
Information
Econometric Theory , Volume 26 , Issue 1 , February 2010 , pp. 119 - 151
Copyright
Copyright © Cambridge University Press 2009

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