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How to Do xtabond2

How to Do xtabond2. David Roodman Research Fellow Center for Global Development. xtabond2 in a nutshell. First ado version in 11/03, Mata version in 11/05. Extends built-in xtabond, to do system GMM, Windmeijer correction, revamped syntax Estimators designed for

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How to Do xtabond2

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  1. How to Do xtabond2 David Roodman Research Fellow Center for Global Development

  2. xtabond2 in a nutshell • First ado version in 11/03, Mata version in 11/05. • Extends built-in xtabond, to do system GMM, Windmeijer correction, revamped syntax • Estimators designed for • Small-T, large-N panels • One dependent variable • Dynamic • Linear • Regressors endogenous and predetermined • Fixed individual effects • Arbitrary autocorrelation and het. within panels • General application

  3. Outline of paper • Introduction to linear GMM • Motivation and design of difference and system GMM • xtabond2 syntax

  4. Black box problem • Canned & sophisticated procedure • Dangers in hidden sophistication • finite sample ≠ asymptotic • Users should understand motivation and limits of estimator

  5. Linear GMM in one slide

  6. Linear GMM and 2SLS

  7. Linear GMM in another slide(Holtz-Eakin, Newey, and Rosen 1988)

  8. Difference and system GMM

  9. Problem: Dynamic Panel Bias (Nickell 1981)

  10. Partial solution: OLS in differences

  11. Problem: Other endogeneity

  12. Solution: Instrument with lags (2SLS)(Anderson and Hsiao 1981)

  13. Problem: Inefficiency

  14. Solution: GMM & GMM-style instruments(Holtz-Eakin, Newey, and Rosen 1988)

  15. Problem: Autocorrelation

  16. Solution: Restrict to deeper lags

  17. Arellano-Bond AR() test

  18. Problem: Weak instruments

  19. Solution: Instead of purging fixed effects, find instruments orthogonal to them(Arellano and Bover 1995)

  20. Relationship among moments(Tue Gorgens)

  21. Problem: Two-step errors too small

  22. Problem, cont’d

  23. Solution: finite-sample correction(Windmeijer 2005)

  24. Problem: too many instruments

  25. Solution: consider limiting instruments

  26. Y X Z “GMM-style” Classic xtabond2 syntax

  27. Examples

  28. Examples, cont’d

  29. Run times for bbest (seconds)700 MHz PC

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