Implementing a strategy to reduce the instrument count in panel GMM
Maria Elena Bontempi
Department of Economics
University of Bologna
Bologna, Italy
[email protected]
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Irene Mammi
Department of Economics
University of Bologna
Bologna, Italy
[email protected]
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Abstract. The problem of instrument proliferation and its consequences—overfitting
of the endogenous explanatory variables, biased instrumental-variables and
generalized method of moments estimators, and weakening of the power of the
overidentification tests—are well known. This article introduces a
statistical method to reduce the instrument count. Principal component analysis
is applied on the instrument matrix, and the principal-component analysis
scores are used as instruments for the panel generalized method of moments
estimation. This strategy is implemented through the new command pca2.
View all articles by these authors:
Maria Elena Bontempi, Irene Mammi
View all articles with these keywords:
pca2, proliferation of instruments, principal component analysis, panel data, generalized method of moments
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