Dynamic Panel Data Analysis

Readings and References:

• T. W. Anderson and C. Hsiao, "Estimation of Dynamic Models with Error Components," Journal of the American Statistical Association, Theory and Methods Section, 76, No. 375, 598-606, 1981.
• M. Arellano and S. Bond, "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, 58, 277-297, 1991.
• B. H. Baltagi, Econopmetric Analysis of Panel Data, 4th. ed., John Wiley, 2008.
• C. Hsiao, Analysis of Panel Data, 2nd. ed., Cambridge University Press, 2003.
• W. H. Greene, Econometric Analysis, 5th ed., Prentice Hall, 2002.
• J. M. Wooldridge, Econometric Analysis of Cross Section and Panel Data, The MIT Press, 2002.

Y_it = aY_it-1 + X_itb + u_i + e_it

where the lagged dependent variable Y_it-1 is a random regressor. That is, E(Y_it-1e_it) ¹ 0. A set of suitable instrumental varaibles should be used to estimate fixed effects model and random effects models.

Model Estimation

Y_it-Y_it-1 = a(Y_it-1-Y_it-2) + (X_it-X_it-1)b + e_it-e_it-1

or, Y_it^* = aY_it-1^* + X_it^*b + e_it^*

The first two observations of each panel are lost in the model.

• Model Estimation with Instrumental Variables

  Because Y_it-1^* is endogenous, instruments such as lags of X_it^* are used (see Anderson and Hsiao, 1981).

• GMM Estimation

  (see Arellano and Bond, 1991)