Inference and estimation in small sample dynamic panel data models

We study the finite sample properties of the most important methods of estimation of dynamic panel data models in a special class of small samples: a two-sided small sample (i.e., a sample in which the time dimension is not that short but the cross-section dimension is not that large). This case is encountered increasingly in applied work. Our main results are the following: the estimator proposed by Kiviet (1995) outperforms all other estimators considered in the literature. However, standard statistical inference is not valid for any of them. Thus, to assess the true sample variability of the parameter estimates, bootstrap standard errors have to be computed. We find that standard bootstrapping techniques work well except when the autoregressive parameter is close to one. In this last case, the best available solution is to estimate standard errors by means of the Grid-t bootstrap estimator due to Hansen (1999).