GMM Estimation for Dynamic Panels with Fixed Effects and Strong Instruments at Unity
This paper develops new estimation and inference procedures for dynamic panel data models with ﬁxed eﬀects and incidental trends. A simple consistent GMM estimation method is proposed that avoids the weak moment condition problem that is known to aﬀect conventional GMM estimation when the autoregressive coeﬀicient (rho) is near unity. In both panel and time series cases, the estimator has standard Gaussian asymptotics for all values of rho in (-1, 1] irrespective of how the composite cross section and time series sample sizes pass to inﬁnity. Simulations reveal that the estimator has little bias even in very small samples. The approach is applied to panel unit root testing.
Han, Chirok and Phillips, Peter C.B., "GMM Estimation for Dynamic Panels with Fixed Effects and Strong Instruments at Unity" (2007). Cowles Foundation Discussion Papers. 1892.