COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1599

GMM Estimation for Dynamic Panels with Fixed Effects
and Strong Instruments at Unity

Chirok Han and Peter C.B. Phillips

January 2007

This paper develops new estimation and inference procedures for dynamic panel data models with fixed effects and incidental trends. A simple consistent GMM estimation method is proposed that avoids the weak moment condition problem that is known to affect conventional GMM estimation when the autoregressive coefficient (rho) is near unity. In both panel and time series cases, the estimator has standard Gaussian asymptotics for all values of rho in (-1, 1] irrespective of how the composite cross section and time series sample sizes pass to infinity. Simulations reveal that the estimator has little bias even in very small samples. The approach is applied to panel unit root testing.

Keywords and Phrases: Asymptotic normality, Asymptotic power envelope, Moment conditions, Panel unit roots, Point optimal test, Unit root tests, Weak instruments

JEL Classification: C22, C23