Discussion paper

DP3048 GMM Estimation of Empirical Growth Models

This Paper highlights a problem in using the first-differenced GMM panel data estimator to estimate cross-country growth regressions. When the time series are persistent, the first-differenced GMM estimator can be poorly behaved, since lagged levels of the series provide only weak instruments for subsequent first-differences. Revisiting the work of Caselli, Esquivel and Lefort (1996), we show that this problem may be serious in practice. We suggest using a more efficient GMM estimator that exploits stationarity restrictions and this approach is shown to give more reasonable results than first-differenced GMM in our estimation of an empirical growth model.

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Citation

Bond, S, A Hoeffler and J Temple (2001), ‘DP3048 GMM Estimation of Empirical Growth Models‘, CEPR Discussion Paper No. 3048. CEPR Press, Paris & London. https://cepr.org/publications/dp3048