RE: st: Dynamic Panel Data

[DE SOUZA Eric <eric.de_souza@coleurope.eu>]

The Beck-Katz approach has been completely ignored in the econometrics literature, even though it is highly popular with political scientists. I am not at all convinced by the Beck and Katz articles on time-series cross-section. I tread carefully here because I have not analysed them rigorously, but my first reaction on coming across their articles a few years ago was scepticism. There was a recent special issue of Pölitical Analysis devoted to the approach recently beginning with a very critical article of the use and abuse of the Beck-Katz approach. It is true that the inconsistency of FE (LDV), RE and FD estimators of DPD models is just that: an asymptotic result. And Beck and Katz rely essentially on Monte Carlo studies (if I'm not mistaken -my treading carefully !!) for the properties of their proposed method.

The DPD approach - incorporated in -xtabond-, -xtdpdsys- and -xtabond2- has its problems also inasfar as small sample bias is concerned. But Windmeijer has proposed a small sample correction which is incorporated in -xtabond2-. I don't know about the official Stata routines:  I have not read the Stata reference. Roodman points out a big problem in the actual use of these routines when applied blindly: too many instruments. He has a paper with that title.

As to the Judson and Owen article,  I do not remember much about its contents. I read it avidly in working paper version because of macroeconomics in the title.


Eric


Eric de Souza
College of Europe
Brugge (Bruges), Belgium
http://www.coleurope.eu




-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Clive Nicholas
Sent: 06 March 2011 21:44
To: statalist@hsphsun2.harvard.edu
Subject: Re: st: Dynamic Panel Data

Eric De Souza replied to Humaira Asad:

> First, let's ignore the fact that your data are five year averages, and consider them as successive time periods. In this case, the introduction of a lagged value of the dependent variable as regressor makes FE, RE and FD inconsistent because the lagged dependent variable, when transformed in order to apply the above methods are correlated with the residuals. You, therefore, have to use instrumental variables. LDV, because it is identical in effects to FE, has the same problem. Stata has a dynamic panel data routine but I have never used it. What I use is -xtabond2- written by David Roodman and which can be downloaded using -ssc install xtabond2- . The method is not simple and would require some reading up on your part. But if you Google, you will find quite a lot of course notes explaining it. You also have the paper by David Roodman himself, but I personally do not recommend it for beginners. If you wish to use the built-in Stata commands , they are -xtabond- and -xtdpds!
 ys!

[...]

Your position is, of course, supported by Judson and Owen (1999). What if, however, the coefficient on the LDV is insignificant? Could not the problem then be ignored? In any case, could one not get round the problem entirely by using -xtpcse- with the -c(psar1)- option? Nat Beck and Jon Katz, in a 2004 paper, certainly think so. They write, in the abstract:

"It is shown that there is nothing pernicious in using a lagged dependent variable, and all dynamic models either implicitly or explicitly have such a variable; the di fferences between the models relate to assumptions about the speeds of adjustment of measured and unmeasured variables. ... It is noted that models with both a lagged dependent variable and serially correlated errors can easily be estimated; it is only OLS that is inconsistent in this situation. We then show, via Monte Carlo analysis shows that for typical TSCS data that fixed eff ects with a lagged dependent variable performs about as well as the much more complicated Kiviet estimator, and better than the Anderson-Hsiao estimator (both designed for panels)."

See http://econpapers.repec.org/paper/cltsswopa/1304.htm for the full paper. I've mentioned Beck, Katz and -xtpcse- so many times in response to Statalist queries over the years, people must think I'm on commission, but I'm not a cab for hire just yet.

--
Clive Nicholas

[Please DO NOT mail me personally here, but at <clivenicholas@hotmail.com>. Please respond to contributions I make in a list thread here. Thanks!]

Judson KA and Owen AL (1999) "Estimating Dynamic Panel Data Models: A Guide for Macroeconomists", Economics Letters (65): 9-15.

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