Identification Problem of GMM Estimators for Short Panel Data Models with Interactive Fixed Effects

Abstract

This paper studies the GMM estimation of short panel data models with interactive fixed effects. We demonstrate that the nonlinear moment conditions proposed by Ahn, Lee and Schmidt (2001, 2013) does not always satisfy the global identification assumption, which is necessary for consistency of GMM. Some numerical examples are provided to confirm this claim. We also demonstrate that the same problem happens for moment conditions proposed by Hayakawa (2012) and Robertson and Sarafidis (2015) since their moment conditions become identical to those of Ahn et al. (2001, 2013) in some cases. Finally, we conduct Monte Carlo simulation and show that the starting value used in the computation of non-linear GMM estimators has a significant effect on the performance.

Keywords: panel data; identification; GMM; interactive fixed effects