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The equivalence of two-step first difference and forward orthogonal deviations GMM

Author

Listed:
  • Robert F. Phillips

    (George Washington University)

Abstract

Generalized method of moments (GMM) estimation of a dynamic panel data model often relies on transforming the data. This note provides a necessary and sufficient condition on the instruments for two-step GMM based on differencing to be equivalent to two-step GMM based on forward orthogonal deviations. The same condition is necessary and sufficient for system GMM, based on differencing, to be equal to system GMM using forward orthogonal deviations.

Suggested Citation

  • Robert F. Phillips, 2020. "The equivalence of two-step first difference and forward orthogonal deviations GMM," Economics Bulletin, AccessEcon, vol. 40(4), pages 2865-2871.
    • Handle: RePEc:ebl:ecbull:eb-20-00800
    as

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    References listed on IDEAS

    as
    1. 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.
    2. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, Decembrie.
    3. Robert F. Phillips, 2020. "Quantifying the Advantages of Forward Orthogonal Deviations for Long Time Series," Computational Economics, Springer;Society for Computational Economics, vol. 55(2), pages 653-672, February.
    4. Phillips, Robert F., 2019. "A numerical equivalence result for generalized method of moments," Economics Letters, Elsevier, vol. 179(C), pages 13-15.
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    More about this item

    Keywords

    first-difference GMM; fixed effects; forward orthogonal demeaning; forward orthogonal deviations; system GMM;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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