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An analysis of the Blundell and bond estimator

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Microeconometrics

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 2

Introduction

In this work, I try to reproduce the results obtained by Blundell and Bond, in their paper of

Journal of Econometrics, 1998. In that paper, the authors proposed a GMM estimator for

the case of Dynamic Panel Data, which improves the properties of other estimators that

appeared before in the literature, under the condition of stationarity.

To get this aim, I have written several programs in GAUSS (a model of them is in the

Appendix). With this programs, I have reproduced the results obtained by Blundell and

Bond, and analyzed the estimators under different conditions.

This work begins with a theoretical introduction, and then I present the results obtained in

the Monte Carlo simulations under the different conditions. There we see that Blundell and

Bond estimator supposes an important improvement with respect to Arellano and Bond

under stationarity conditions, as was already shown in the paper. I have checked the

consistency of this fact increasing the number of Monte Carlo repetitions. In a next step, I

have allowed for different ratio of variances, between the time-invariant and the usual

shock. Finally, I have checked the importance of stationarity assumptions for the validity of

the estimator. This is very important, because if we are going to use the estimator, we must

check before this condition. In other case, the Blundell and Bond estimator will present a

high bias.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 3

followed over T time periods. The continuity of observations over time is the main

difference between a panel and a sequence of independent cross-sections.

Therefore, in a panel we can distinguish two dimensions: N (cross-sectional dimension)

and T (time-series dimension). Let yit be the variable of the variable y for the individual i

and the period t.

In our case, we are going to work with dynamic panel data, that is, where we have lags of

the endogenous variable as regressors. So the simplest dynamic Panel Data model is the

AR(1) PD model:

Yit = αyit-1 + ηi + uit

Here the ηi represents the individual effect, that is, a time-invariant effect of each

individual. This effect produces some problems in the classical estimators. Because of that,

several specific estimators have been developed for panel data. However, the estimators

used in the static case, usually have bad properties in a dynamic model.

It is the case when we take differences. Let the model:

Yit = αxit + uit, we take differences, and the model is transformed to:

ΔYit = αΔxit + Δuit

But if we have a dynamic model:

ΔYit = αΔyit-1 + Δuit

We have that E(ΔYit-1*Uit) 0 and then classical regression by OLS is inconsistent.

Anderson and Hsiao (JE, 1982) proposed an IV estimator, using yit-2 as instrument of Δyit-2:

N T

^ y it y it 2

AH i 1 t 1

N T

, given that E (u it y it 2 ) 0 .

y

i 1 t 1

it 1 y it 2

But in general, as T increases, more moment conditions are available for estimation. If uit is

iid, we have in fact the following moment conditions:

t=3: {yi1} E ( y i 2 u i 3 ) 0

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 4

E ( y i 3 u i 4 ) 0

E ( y i 3 u i 5 ) 0

E ( y i 4 u i 5 ) 0

…

Thus we have (T-2)(T-1)/2 moment conditions. This was used by Arellano and Bond

(REStud, 1991) to develop an estimator where all these moment conditions were used:

Yi ,' 1 * Z i AN Z ' i *Yi

AB i i

Yi ,' 1 * Z i AN Z 'i *Yi , 1

i i

y i ,1 0 0 ... 0 0 ... 0

0 y i ,1 yi ,2 ... 0 0 ... 0

Where Z iAB

... ... ... ... ... ... ... ...

0 0 0 ... y i ,1 yi,2 ... y i ,T 2

is the [(T-2)x(T-2)(T-1)/2] matrix of instruments.

Even if we use all the moment conditions of the model, and use the optimal GMM

estimator, what we are doing is instrumenting Δyit-1 with lagged values of y. This can

produce a problem if the instruments are weak. In such case, the estimator can be seriously

biased in small samples. This problem is more important when α increases or if ση is much

greater than σu.

To solve the problem of weak instruments, Blundell and Bond (JE, 1998) proposed to use

some additional conditions, that hold under stationarity. They consider the following T-2

linear moment conditions:

E (vit y i ,t 1 ) 0 , vit=ηi+εit, t=4, 5, …, T.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 5

The validity of the first condition, E (vi 3 y i , 2 ) 0 , depends on a restriction on the initial

conditions process generating yi1. To see that, let’s write yi1 in the following way:

i

y i1 vi1

1

The model specifies a convergent level for yit from t = 2 onwards for each individual, and

vi1 is simply the initial deviation from this convergent level. The key requirement is that the

deviations of the initial conditions from ηi/(1-α) are uncorrelated with the level of ηi/(1-α)

itself.

This condition is clearly satisfied in the stationary model. In such case we can use

additional moment restrictions to those used by αAB. The estimator developed by Blundell

and Bond is therefore:

bb

Ybbi

'

, 1 * Z i AN Z ' i *Ybbi

bb

BB i i where

bb

Ybbi

'

, 1 * Z i AN Z ' i *Ybbi , 1

bb

i i

Y’bbi=(Δyi3, Δyi4, …, ΔyiT, yi3, yi4, …, yiT) and the matrix of instruments is:

Z iAB 0 0 ... 0

0 y 2 0 ... 0

Z ibb 0 0 y3 ... 0 . The 2-estep estimator uses a weighting matrix that

... ... ... ... ...

0 0 0 ... yT 2

is a consistent estimation of the optimal one:

1

AN Z i'bb * ûi * ûi' * Z ibb , where ûi are the residuals of the 1-step estimation. For

i

the Arellano and Bond estimator it is done in the same way.

We will check the important improvement that supposes the αBB estimator with respect to

αAB, specially for high values of the parameter α. But it is important to remember that the

assumption of stationarity is crucial.

Blundell and Bond run Monte Carlo simulations in order to compare the result of their

own estimator against other estimators developed in the literature. In the present work, we

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 6

have tried to reproduce their results through a GAUSS program, and increase the results,

comparing them with the Arellano and Bond estimator. This has been done in several

steps:

I. We have done a program in order to reproduce Blundell and Bond model A results

II. We try to mimic Blundell and Bond model B.

III. We study how the behaviour of the estimator is with a higher amount of Monte

Carlo repetitions. We increase them from 1000 (as in Blundell and Bond paper) to

10000.

IV. We study the effect of different values in the ratio of variances . It is already done,

u

in some sense, in model B, but now we do it explicitly.

V. And finally, we check how important the assumption of stationarity is for the validity

of the estimator.

I. Model A

In this first step, we have done a GAUSS program in order to reproduce Blundell and

Bond results. The used model is the simplest one, an AR(1) Panel Data, of the type:

Yit = αyit-1 + ηi + uit

To construct it, we have generated ηi and uit as independent random variables, following a

N (0, 1). In order to preserve stationarity, the first observations for each individual have

been generated as follows:

i u i1

y i1

1 1 2

We have run the program for different values of the parameter (α = 0, 0’3, 0’5, 0’8 and 0’9),

of the total number of individuals (N = 100, 200 and 500) and the time periods (T = 4 and

11), as it was done by Blundell and Bond (see p. 131 and 133). The results are in Table 1.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 7

Model A [(R = 1000), =1]

u

N α BB AB N α BB AB

0.0049831456 -0.0048983 -0.027517865 -0.05721

0.0 0.0

(0.11322896) (0.13160) (0.046799371) (0.04863)

0.30684442 0.2772372 0.26304106 0.191167

0.3 0.3

(0.13479990) (0.19633) (0.056263162) (0.06192)

0.49848940 0.4231966 0.45658576 0.3078266

100 0.5 100 0.5

(0.14704969) (0.268552) (0.061996495) (0.0734)

0.80931538 0.3419298 0.78771677 0.24679

0.8 0.8

(0.15991421) (0.656859) (0.066539117) (0.12409)

0.94657421 0.122917 0.92720307 0.100476

0.9 0.9

(0.12076436) (0.763042) (0.045849438) (0.14644)

0.0054118358 -0.0006256 -0.0025200164 -0.014097

0.0 0.0

(0.080369236) (0.093267) (0.032821312) (0.03416)

0.30513597 0.2872416 0.28790234 0.25212

0.3 0.3

(0.099862345) (0.135816) (0.041942196) (0.0459)

T=4 0.50382332 0.4706295 T=11 0.47835073 0.396029

200 0.5 200 0.5

(0.10378305) (0.185847) (0.043843576) (0.05352)

0.79477801 0.5192762 0.79976270 0.426721

0.8 0.8

(0.13683581) (0.632401) (0.052050151) (0.09675)

0.93343879 0.2492752 0.92711700 0.231163

0.9 0.9

(0.11823080) (0.73541) (0.035799094) (0.14534)

4.464949e-005 0.0034931 0.0067363026 0.0043462

0.0 0.0

(0.050569751) (0.057833) (0.021615904) (0.02266)

0.30332023 0.2959381 0.30105487 0.287396

0.3 0.3

(0.062763973) (0.084860) (0.025760263) (0.02877)

0.49666413 0.4883252 0.49988065 0.466532

500 0.5 500 0.5

(0.072495723) (0.119746) (0.028749805) (0.03493)

0.79516281 0.6883453 0.80295248 0.607475

0.8 0.8

(0.091884836) (0.310432) (0.033119165) (0.06641)

0.91114319 0.5214391 0.91889941 0.43842

0.9 0.9

(0.095127788) (0.477994) (0.029063808) (0.11108)

Table 1

The results are quite similar to those reported by Blundell and Bond. We can see that BB

estimator presents a lower variance systematically. Moreover, we can observe huge

improvement of the estimation when α tends to 1. In fact, for a low value of N, the

improvement is clear even for α = 0.3.

II. Model B

In the second step, we have reproduced Blundell and Bond results. The model used is an

AR(1) Panel Data, with a slight difference:

Yit = αyit-1 + (1-α)ηi + uit

To construct it, we have generated ηi and uit as independent random variables, following a

N (0, 1). In order to preserve stationarity, the first observations for each individual have

been generated as follows:

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 8

u i1

y i1 i

1 2

In this model, the contribution of the time-invariant component of the error term becomes

less important as the autoregressive parameter α increases. In this framework, Arellano and

Bond estimator should behave better when α is high.

We have run the program for different values of the parameter (α = 0, 0’3, 0’5, 0’8 and 0’9),

of the total number of individuals (N = 100, 200 and 500) and the time periods (T = 4 and

11), as it was done by Blundell and Bond (see p. 132). In the original paper, only results for

T=4 are reported. The results are in Table 2.

Model B [(R = 1000), 1]

u

N α BB AB N α BB AB

0.0013850095 -0.0142129 -0.019652490 -0.045368

0.0 0.0

(0.11414104) (0.137451) (0.049226511) (0.05202)

0.29254933 0.2729351 0.25286167 0.197224

0.3 0.3

(0.12259375) (0.165854) (0.054787265) (0.0593)

0.48347016 0.4485744 0.43547260 0.3394997

100 0.5 100 0.5

(0.13030352) (0.193059) (0.057402607) (0.06656)

0.76035983 0.6939884 0.69011873 0.4432926

0.8 0.8

(0.14145872) (0.400227) (0.063646260) (0.09432)

0.84827821 0.685177 0.78637444 0.3917432

0.9 0.9

(0.13674882) (0.40915) (0.063547370) (0.11394)

0.032381835 0.003963 -0.0053938654 -0.017013

0.0 0.0

(0.11265469) (0.125929) (0.034860240) (0.03642)

0.29919580 0.2898283 0.28268194 0.2555386

0.3 0.3

(0.092162634) (0.120358) (0.039480382) (0.04276)

T=4 0.49339280 0.485653 T=11 0.46926554 0.4179540

200 0.5 200 0.5

(0.093346278) (0.13453) (0.042101973) (0.04909)

0.77876733 0.7346263 0.74198174 0.5854094

0.8 0.8

(0.10248012) (0.20043) (0.044511010) (0.06541)

0.87043262 0.7798692 0.83701618 0.5578643

0.9 0.9

(0.10104479) (0.25585) (0.045976594) (0.08843)

0.0011549218 -0.002303 0.0078316824 0.0052062

0.0 0.0

(0.050325535) (0.05923) (0.021807657) (0.0228)

0.30405522 0.3025358 0.30059225 0.2922538

0.3 0.3

(0.056914278) (0.073603) (0.025697260) (0.02817)

0.49641947 0.4927926 0.49333016 0.4745033

500 0.5 500 0.5

(0.063362938) (0.090513) (0.028056675) (0.03242)

0.79395100 0.7788280 0.77746611 0.705866

0.8 0.8

(0.063356133) (0.117142) (0.029092788) (0.04013)

0.88906497 0.8579092 0.87329269 0.7330217

0.9 0.9

(0.062356497) (0.165437) (0.029310603) (0.05497)

Table 2

Once more, results presented for T=4 are very similar to those of the original paper.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 9

clearly better in such cases. We find a strange phenomenon too, that I cannot explain: it is

clearly better the estimation with T=4 that with T=11, especially for N = 100 and N = 200.

Now we run the same model increasing the number of Monte Carlo simulations from 1000

to 10000, in order to check if the results stay similar.

Model A [(R = 10000), =1]

u

N α BB AB

0.0050687793 -0.0079597431

0.0

(0.11063514) (0.13159424)

0.30156469 0.26885794

0.3

(0.13588975) (0.19147359)

0.49936250 0.42555603

100 0.5

(0.14892719) (0.27026541)

0.81745797 0.35646888

0.8

(0.15931312) (0.67286342)

0.94347875 0.14048905

0.9

(0.13414458) (0.80686069)

0.0028422565 -0.0032446519

0.0

(0.078725215) (0.093423322)

0.30146155 0.28476577

0.3

(0.098095436) (0.13747429)

T=4 0.49805051 0.46205256

200 0.5

(0.11103741) (0.19183032)

0.80170131 0.54457265

0.8

(0.12915948) (0.53322957)

0.93037796 0.27110661

0.9

(0.11970693) (0.79803316)

0.00034976427 -0.0023284333

0.0

(0.049868596) (0.058170875)

0.30026084 0.29451745

0.3

(0.062433917) (0.086060173)

0.49925665 0.48439846

500 0.5

(0.072226441) (0.12072350)

0.79652586 0.70164417

0.8

(0.089034999) (0.32147150)

0.90947477 0.51220218

0.9

(0.095131498) (0.64127056)

Table 3

The results are almost identical to those in Table 1. There are no gains from increasing the

Monte Carlo simulations: 1000 repetitions give robust results.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 10

Although in Model B there is an implicit change in the ratio of variances, its effect can not

be clearly analyzed because we are varying the coefficient at the same time.

Now we analyze the model in two different situations, for = 10 and for = 0.1.

u u

In the second case, we expect a higher difference between the accuracy of the two

estimators, while in the first case the differences should be smaller.

N α BB AB N α BB AB

-0.0066745913 -0.04687 -0.0019319829 -0.008012

0.0 0.0

(0.17416340) (0.18202) (0.10168367) (0.1432)

-0.35354215 0.3313201 0.29786016 0.292995

0.3 0.3

(0.048992941) (0.019560) (0.10950294) (0.2169)

0.52318759 0.5197222 0.48944116 0.4581884(

100 0.5 100 0.5

(0.068800740) (0.022936) (0.10369861) 0.28575)

T=4 0.80408576 0.8137522 T=4 0.77732440 0.45374

Model A 0.8 Model A 0.8

(0.071329701) (0.034339) (0.088528826) (0.6297)

R = 1000 0.91057924 0.9134156 R = 1000 0.87745257 0.206751

0.9 0.9

(0.057839533) (0.051063) (0.081425462) (0.83853)

=10 -0.0077105824 -0.002303 =0.1 -0.00146654 -0.002558

u 0.0

(0.10887890) (0.05923)

u 0.0

(0.0461041) (0.06355)

0.33588495 0.332643 0.30070418 0.307115

0.3 0.3

(0.019148) (0.008651) (0.05266107) (0.10422)

0.51878982 0.5206954 0.50097682 0.50492

500 0.5 500 0.5

(0.030047062) (0.00982) (0.04780504) (0.13236)

0.81213214 0.818143 0.79593353 0.743555

0.8 0.8

(0.0235557) (0.015081) (0.03980298) (0.2419)

0.91189106 0.91981 0.89624223 0.614952

0.9 0.9

(0.0174179) (0.02132) (0.0343665) (0.56125)

Table 4

As it was expected, in the case 10 the differences between both estimators have

u

been reduced a lot. In fact, we obtain very accuracy estimations with AB for high values

of α. The effects go in the opposite direction for the case 0.1 .

u

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 11

We have already said that Blundell and Bond estimator depends crucially on the

assumption of stationarity. As illustration, we have run model A but with the difference,

that now the initial observation comes from a Normal (0, 1). With this fact, the moment

conditions proposed by the authors are not valid. Let’s see it:

Model A [(R = 1000), =1]: Non stationary initial observation

u

N α BB AB N α BB AB

0.32384676 -0.0205896 0.029226306 -0.0468843

0.0 0.0

(0.13993746) (0.163873) (0.049673531) (0.0492)

0.78008025 0.3371015 0.38260427 0.190565

0.3 0.3

(0.0899221) (0.19088) (0.057111640) (0.063384)

0.94908602 0.508862 0.65377387 0.2782508

100 0.5 100 0.5

(0.0433564) (0.2082133) (0.056774175) (0.081906)

1.1677582 0.780303 1.0169673 0.4439581

0.8 0.8

(0.0545082) (0.2020023) (0.024415124) (0.11302)

1.2545664 0.89713993 1.0820646 0.72318

0.9 0.9

(0.0516314) (0.1594972) (0.013196016) (0.062814)

0.34311635 -0.001604 0.047401374 -0.014676

0.0 0.0

(0.102995) (0.12364) (0.034771375) (0.035574)

0.79276587 0.36370138 0.40685161 0.249626

0.3 0.3

(0.0657749) (0.13819) (0.040806362) (0.044806)

T=4 0.95432754 0.5500552 T=11 0.68089671 0.377082

200 0.5 200 0.5

(0.025923) (0.13513) (0.043843576) (0.059999)

1.1697722 0.82273433 1.031335 0.5866704

0.8 0.8

(0.0356101) (0.133667) (0.016726425) (0.07385)

1.2552682 0.91348895 1.0877592 0.8085434

0.9 0.9

(0.036492734) (0.11313) (0.0084979543) (0.034047)

0.34669378 -0.0034842 0.058401462 0.0052657

0.0 0.0

(0.064337624) (0.07889) (0.021602949) (0.021919)

0.80278285 0.37221893 0.42099546 0.287035

0.3 0.3

(0.0386459) (0.085817) (0.025656278) (0.029133)

0.95674833 0.5865772 0.70101457 0.455245

500 0.5 500 0.5

(0.015158835) (0.085982) (0.025276663) (0.038121)

1.1750052 0.84912408 1.0382148 0.7037929

0.8 0.8

(0.023372962) (0.081199) (0.010045622) (0.04006)

1.259001 0.93614021 1.0908779 0.864078

0.9 0.9

(0.0227082) (0.06846) (0.0053962332) (0.01937)

Table 5

Now the estimator BB is clearly biased. In fact, with this initial condition, AB produces

estimations not highly biased, even for values of α near 1.

Thus, it is important to know clearly how the initial conditions are. Their effect can be very

important for the accuracy of the estimator.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 12

References

Dynamic Models Using Panel Data," Journal of Econometrics, 18, 47-82.

Arellano, Manuel and Stephen Bond, 1991, "Some Tests of Specification for Panel

Data: Monte Carlo Evidence and an Application to Employment Equations,"

Review of Economic Studies, 58, 277-297.

Blundell, Richard and Stephen Bond, 1998, "Initial conditions and moment

restrictions in dynamic panel data models," Journal of Econometrics, 87, 115-143.

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 13

Appendix

I have done and run the program with GAUSS 6.0. The program computes the Arellano

and Bond and the Blundell and Bond one- and two-step estimator. Moreover, it allows that

the coefficient varies for α= 0, .3, .5, .8 and .9, that the time period varies (T=4 and 11) and

variation in the number of individuals (N=100, 200 and 500).

/* program ARG:alfonsobb2.gauss */

new; library pgraph; graphset;

resfile="alfonsobb2.RES"; OUTPUT FILE=^resfile RESET; OUTPUT FILE=^resfile ON;

"Program alfonsobb2.gauss";

" Examines GMM BB implementation in a stable panel AR(1) model";

Yit = gamma0 + gamma1*YLit + ETAi + EPSit

If we First differenced it we get:

DYit = gamma1*DYLit + Uit

*/

extraperiods=0;

do while extraperiods<10;

bign=0;

do while bign<3;

bign=bign^2+1;

parametr=-1;

do while parametr<9;

/* Here we initialize a loop in order to automatize the different values of the autorregressive parameter */

parametr=parametr+2;

condition=parametr;

parametro=parametr;

if condition<2;

parametro=0;

endif;

if condition>6 and condition<9;

parametro=8;

endif;

/* Number of Monte Carlo repetitions (R), individuals (N) and periods (T) */

gamma0=0; gamma1=parametro/10; gamma2=0; gamma3=1; beta0=0; beta1=0;

/* Coefficients of the model */

etari=rndn(R,N); EPSi0=rndn(R,N); wi0=rndn(R,N); Yi0=/* (1-gamma1)* this is necessary for initial

condition of model B gamma3* */ etari/(1-gamma1)+gamma3* EPSi0/sqrt(1-gamma1^2)

/*Initial condition proposed by Kiviet *//* Some variables of the model */;

ABc=((T-2)*(T-1)/2); ABr=(T-2); BBc=(T-2+(T-2)*(T-1)/2); BBr=(T-2+T-2);

/* Columns and rows of Arellano and Bond, and Blundell and Bond, instruments matrices */

vecgam=zeros(R,1); vecgamA=zeros(R,1); /*We will use this vector to accumulate the different values of the

estimators across Monte Carlo simulations*/

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 14

vecgam2=zeros(R,1); vecgamA2=zeros(R,1); /* We will use this vector to accumulate the different values of

the estimators across Monte Carlo simulationns */

mc=0;

do while mc<R; /* We start the Monte Carlo repetitions: */

mc=mc+1;

ybb=zeros(2*(T-2),N); lybb=ybb;

/* We define dimensions for the matrices where we aggregate partial results for each individual, in order to

compute the BB estimator */

ZZA=zeros(ABc,ABc); lyZA=zeros(ABc,1); yZA=zeros(ABc,1); zAbzAb=ZZA; lyZAb=lyZA; yZAb=yZA;

/* We define dimensions for the matrices where we aggregate partial results for each individual, in order to

compute the AA estimator */

i=0;

do while i<N; /* We start the process for individual i */

i=i+1;

epsit=rndn(T,1); /* The noise along periods of individual i */

yy=zeros(T,1);

tt=1;

yy[tt]=Yi0[mc,i]; /* First observation yy of individual i */

do while tt<T; /* We start the process for period t */

tt=tt+1;

generated the Yit */

endo; /* Next period t */

/* We regress the model in a combination of first differences (it comes from A-B especification) and

levels (it is added by Blundell and Bond), what is correct under stationarity */

yiab=yy[3:T]-yy[2:T-1];

yibb=yiab|yy[3:T];

/* The BB dependent variable includes the original dependent variable in differences and in levels */

lyiab=yy[2:T-1]-yy[1:T-2];

lyibb=lyiab|yy[2:T-1];

/* The BB first lag variable includes the original first lag variable in differences and in levels */

ybb[.,i]=yibb;

lybb[.,i]=lyibb;

/* It has benn done */

tt=0;

ttt=1;

ZABi=zeros(ABr,ABc); /* We construct now the Arellano and Bond instruments matrix. Dimensions

are defined at the beginning of the program */

do while tt<T-2;

ttt=ttt+tt;

tt=tt+1;

ZABi[tt,ttt:ttt+tt-1]=yy[1:tt]';

endo; /* Next tt */

tt=0;

ZBBi=zeros(BBr,BBc); /* We construct now the Blundell and Bond instruments matrix. Dimensions

are defined at the beginning of the program */

ZBBi[1:ABr,1:ABc]=ZABi;

do while tt<T-2;

tt=tt+1;

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 15

ZBBi[ABr+tt,ABc+tt]=lyibb[tt];

endo; /* We have constructed so the BB instruments matrix for individual i */

[(sum over i of Yi-1'ZBBi)(invers of sum over i of ZBBi'ZBBi)(sum over i of ZBBi'Yi)]

betahat = ______________________________________________________________________

[(sum over i of Yi-1'ZBBi)(invers of sum over i of ZBBi'ZBBi)(sum over i of ZBBi'Yi-1)]

So we compute each component, and save them to add them up caross different individuals i: */

zbbzbb=ZBBi'ZBBi;

lyzbb=ZBBi'*lyibb;

yzbb=ZBBi'*yibb;

ZZ=ZZ+zbbzbb;

lyZ=lyZ+lyzbb;

yZ=yZ+yzbb; /* We aggregate the values for the different i's and we obtain BB estimator */

zabzab=ZABi'ZABi;

lyzab=ZABi'*lyiab;

yzab=ZABi'*yiab;

ZZA=ZZA+zabzab;

lyZA=lyZA+lyzab;

yZA=yZA+yzAb;

invzz=invpd(ZZ);

lyzinvzz=lyZ'invzz;

gamma1estmc=(invpd(lyzinvzz*lyZ))*lyzinvzz*yZ;

vecgam[mc]=gamma1estmc; /* Here we accumulate the different values of the BB estimator */

invzzA=invpd(ZZA);

lyzinvzzA=lyZA'invzzA;

gamma1estmcA=(invpd(lyzinvzzA*lyZA))*lyzinvzzA*yZA;

vecgamA[mc]=gamma1estmcA; /* Here we accumulate the different values of the BB estimator */

/* ---------------------------------------------------------------------------------------- */

/* Now we compute the Two-steps estimaotrs */

/* ---------------------------------------------------------------------------------------- */

lyZbb=lyZ; yZbb=yZ;/* We define dimensions for the matrices where we aggregate partial results for each

individual, in order to compute the BB estimator */

ZZA=zeros(ABc,ABc); lyZA=zeros(ABc,1); yZA=zeros(ABc,1); zAbzAb=ZZA;

lyZAb=lyZA; yZAb=yZA;/* We define dimensions for the matrices where we aggregate partial results for

each individual, in order to compute the AA estimator */

i=0;

do while i<N; /* We start the process for individual i */

i=i+1;

tt=0;

ttt=1;

ZABi=zeros(ABr,ABc); /* We construct now the Arellano and Bond instruments matrix. Dimensions

are defined at the beginning of the program */

do while tt<T-2;

ttt=ttt+tt;

tt=tt+1;

ZABi[tt,ttt:ttt+tt-1]=ybb[1:tt,i]';

endo; /* Next tt */

tt=0;

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 16

ZBBi=zeros(BBr,BBc); /* We construct now the Blundell and Bond instruments matrix. Dimensions

are defined at the beginning of the program */

ZBBi[1:ABr,1:ABc]=ZABi;

do while tt<T-2;

tt=tt+1;

ZBBi[ABr+tt,ABc+tt]=lybb[tt,i];

endo; /* We have constructed so the BB instruments matrix for individual i */

[(sum over i of Xi'ZBBi)(invers of sum over i of ZBBi'A*ZBBi)(sum over i of ZBBi'Yi)]

betahat = _____________________________________________________________________

[(sum over i of Xi'ZBBi)(invers of sum over i of ZBBi'A*ZBBi)(sum over i of ZBBi'Xi)]

So we compute each component, and save them to add them up across different individuals i: */

epsestbbi=ybb[.,i]-gamma1estmc*lybb[.,i];

matrixAbbi=epsestbbi*epsestbbi';

epsestabi=ybb[1:(T-2),i]-gamma1estmcA*lybb[1:(T-2),i];

matrixAabi=epsestabi*epsestabi';

zbbzbb=ZBBi'matrixAbbi*ZBBi;

lyzbb=ZBBi'*lybb[.,i];

yzbb=ZBBi'*ybb[.,i];

ZZ=ZZ+zbbzbb;

lyZ=lyZ+lyzbb;

yZ=yZ+yzbb; /* We aggregate the values for the different i's and we obtain BB estimator */

zabzab=ZABi'matrixAabi*ZABi;

lyzab=ZABi'*lybb[1:(T-2),i];

yzab=ZABi'*ybb[1:(T-2),i];

ZZA=ZZA+zabzab;

lyZA=lyZA+lyzab;

yZA=yZA+yzAb;

invzz=invpd(ZZ);

lyzinvzz=lyZ'invzz;

gamma1estmc2=(invpd(lyzinvzz*lyZ))*lyzinvzz*yZ;

vecgam2[mc]=gamma1estmc2; /* Here we accumulate the different values of the BB2 estimator */

invzzA=invpd(ZZA);

lyzinvzzA=lyZA'invzzA;

gamma1estmcA2=(invpd(lyzinvzzA*lyZA))*lyzinvzzA*yZA;

vecgamA2[mc]=gamma1estmcA2; /* Here we accumulate the different values of the BB2 estimator */

"R = "; R; "N = "; N; "T = "; T;

"Coefficient = "; gamma1;

"_________________________________________";

"Monte Carlo mean of BB1 estimator: ";

meanc(vecgam);

"Monte Carlo std of BB1 estimator: ";

stdc(vecgam);

"Monte Carlo mean of AB1 estimator: ";

meanc(vecgamA);

"Monte Carlo std of AB1 estimator: ";

stdc(vecgamA);

"_________________________________________";

Analysis of the Blundell and Bond Estimator – by Alfonso Rosa García 17

meanc(vecgam2);

"Monte Carlo std of BB2 estimator: ";

stdc(vecgam2);

"Monte Carlo mean of AB2 estimator: ";

meanc(vecgamA2);

"Monte Carlo std of AB2 estimator: ";

stdc(vecgamA2);

"==========================================";

\\\\\\\\\\\\\\\\\\\\\\\\ ";

"==========================================";

endo; /* Change of N */

OF T 88888888888 ";

"==========================================";"===================

=======================";

extraperiods=extraperiods+7;

endo;

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