Dynamic Panel Data Concepts

Question 1

Dynamic POLS

Answer 1

• Dynamic POLS is used when estimating dynamic data with Pooled OLS.
• Due to the fixed effect u, there is positive correlation between the lagged dependent variable and the composite residual. Therefore POLS is likely to overestimate.

Question 2

Dynamic FE

Answer 2

• Dynamic FE is applying FE (demeaning) to a dynamic panel.
• The lagged dependent variable is negatively correlated with the FE residuals in a dynamic panel. Therefore, dynamic FE is likely to underestimate. Increasing the time span of the panel can reduce the bias.

Question 3

Dynamic FD

Answer 3

The lagged dependent variable is, like under dynamic FE, negatively correlated with the FD residual. Therefore, dynamic FD is likely to underestimate. This bias will also persist if the time span of the panel is increased.

Question 4

Nickel Bias

Answer 4

The Nickell bias refers to the fact that when estimating dynamic panels using POLS the parameter will be overestimated and when using FE/FD the parameter will be underestimated.

Question 5

Anderson-Hsiao IV estimator

Answer 5

This estimator tries to overcome the Nickell bias. This instrumental variable estimation method leads to consistent but not necessarily efficient estimates of the parameters in the model because it does not make use of all the available moment conditions.

Question 6

Generalized Methods of Moments procedure (GMM)

Answer 6

A model that is specified as a system of equations, one per time period, where the instruments applicable to each equation differ (of instance, in later time periods, additional lagged values of the instruments are available)

Question 7

Arellano-Bond GMM estimator

Answer 7

Arellano and Bond argue that the Anderson-Hsiao estimator, while consistent, fails to take all of the potential orthogonality conditions into account.
Situation in which the AB estimator is appropriate:
- Small T, large N panels,
- linear functional relationships
- fixed individual effects, implying unobserved heterogeneity
- heteroscedasticity and autocorrelation within individual units errors, but not across them
Disadvantage
- magnifies the gap in unbalanced panels

Question 8

Blundell-Bond system-GMM estimator

Answer 8

The BB system estimator involves a set additional restrictions on the initial conditions of the process generating y and improves on the limitations of the AB estimator.