How to do xtabond2: An introduction to difference and system GMM in Stata
Abstract.
The difference and system generalized method-of-moments estimators,
developed by Holtz-Eakin, Newey, and Rosen (1988, Econometrica 56:
1371–1395); Arellano and Bond (1991, Review of Economic Studies
58: 277–297); Arellano and Bover (1995, Journal of Econometrics
68: 29–51); and Blundell and Bond (1998, Journal of
Econometrics 87: 115–143), are increasingly popular. Both are
general estimators designed for situations with “small T, large
N” panels, meaning few time periods and many individuals; independent
variables that are not strictly exogenous, meaning they are correlated with
past and possibly current realizations of the error; fixed effects; and
heteroskedasticity and autocorrelation within individuals. This pedagogic
article first introduces linear generalized method of moments. Then it
describes how limited time span and potential for fixed effects and
endogenous regressors drive the design of the estimators of interest,
offering Stata-based examples along the way. Next it describes how to apply
these estimators with xtabond2. It also explains how to perform the
Arellano–Bond test for autocorrelation in a panel after other Stata
commands, using abar. The article concludes with some tips for proper
use.
View all articles by this author:
David Roodman
View all articles with these keywords:
xtabond2, generalized method of moments, GMM, Arellano–Bond test, abar
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