DP3048 GMM Estimation of Empirical Growth Models

Author(s):	Stephen Roy Bond, Anke Hoeffler, Jonathan Temple
Publication Date:	November 2001
Keyword(s):	convergence, generalized method of moments, growth, weak instruments
JEL(s):	O41, O47
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=3048

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.