Thursday, January 05, 2006

st: xtabond2: gmm in levels only meaningful?

Dear all, the System-GMM estimator exploits moment conditions for equation in differences AND for equation in levels.

However, using xtabond2 ..., gmm(depvar, lag(2 .) equ(BOTH)) ... I do not get plausibel results (in almost all cases the Hansen J Test indicates overidentifying restrictions).

But when using xtabond2 ..., gmm(d.depvar, lag(2 .) equ(LEVEL)) ... [WITHOUT an additional gmm(depvar, lag(2 .) equ(diff) command] the results are economically plausibel and the Hansen J Test is ok.

My understanding of GMM is, that one has to use the equation in differences to get rid of the individual effects. In addition, one can exploit the equation in levels and use differences of the depvar as instruments for those.

But I have not seen GMM estimators, that use ONLY the equation in levels. However, maybe anybody knows of such cases and is able to give some references. I would greatly appreciate any help since I already spent a lot of time searching for valuable information on this topic.


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