Double Filter Instrumental Variable Estimation of Panel Data Models with Weakly Exogenous Variables

64 Pages Posted: 10 May 2017 Last revised: 30 Jul 2018

See all articles by Kazuhiko Hayakawa

Kazuhiko Hayakawa

Hiroshima University

Meng Qi

Hiroshima University

Jörg Breitung

University of Cologne

Date Written: June 4, 2018

Abstract

In this paper, we propose instrumental variables (IV) and generalized method of moments (GMM) estimators for panel data models with weakly exogenous variables. The model is allowed to include heterogeneous time trends besides the standard fixed effects. The proposed IV and GMM estimators are obtained by applying a forward filter to the model and a backward filter to the instruments in order to remove fixed effects, thereby called the double filter IV and GMM estimators. We derive the asymptotic properties of the proposed estimators under fixed T and large N, and large T and large N asymptotics where N and T denote the dimensions of cross section and time series, respectively. It is shown that the proposed IV estimator has the same asymptotic distribution as the bias corrected fixed effects estimator when both N and T are large. Monte Carlo simulation results reveal that the proposed estimator performs well in finite samples and outperforms the conventional IV/GMM estimators using instruments in levels in many cases.

Keywords: GMM; panel data; weak exogeneity; dynamic panel

Suggested Citation

Hayakawa, Kazuhiko and Qi, Meng and Breitung, Jörg, Double Filter Instrumental Variable Estimation of Panel Data Models with Weakly Exogenous Variables (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=2965277 or http://dx.doi.org/10.2139/ssrn.2965277

Kazuhiko Hayakawa (Contact Author)

Hiroshima University ( email )

Japan

Meng Qi

Hiroshima University ( email )

739-0046
Japan

Jörg Breitung

University of Cologne ( email )

Albertus-Magnus-Platz
Cologne, 50923
Germany

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