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First Difference or Forward Orthogonal Deviation- Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study

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  • Kazuhiko Hayakawa

    (Hiroshima University)

Abstract

This paper compares the performances of the generalized method of moments (GMM) estimator of dynamic panel data model wherein unobserved individual effects are removed by the forward orthogonal deviation or the first difference. The simulation results show that the GMM estimator of the model transformed by the forward orthogonal deviation tends to work better than that transformed by the first difference.

Suggested Citation

  • Kazuhiko Hayakawa, 2009. "First Difference or Forward Orthogonal Deviation- Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study," Economics Bulletin, AccessEcon, vol. 29(3), pages 2008-2017.
    • Handle: RePEc:ebl:ecbull:eb-09-00361
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    References listed on IDEAS

    as
    1. Kazuhiko Hayakawa, 2007. "A Simple Efficient Instrumental Variable Estimator in Panel AR(p) Models," Hi-Stat Discussion Paper Series d07-213, Institute of Economic Research, Hitotsubashi University.
    2. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    3. Hayakawa, Kazuhiko, 2009. "A SIMPLE EFFICIENT INSTRUMENTAL VARIABLE ESTIMATOR FOR PANEL AR(p) MODELS WHEN BOTH N AND T ARE LARGE," Econometric Theory, Cambridge University Press, vol. 25(3), pages 873-890, June.
    4. Bun, Maurice J.G. & Kiviet, Jan F., 2006. "The effects of dynamic feedbacks on LS and MM estimator accuracy in panel data models," Journal of Econometrics, Elsevier, vol. 132(2), pages 409-444, June.
    5. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
    6. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    dynamic panel data model; first difference; forward orthogonal deviation; GMM;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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