Dear Stata users,

I am using the System GMM approach for estimation and I want to introduce time dummies as well. For example as:

(1) y l.y yr*, robust small gmmstyle(y) ivstyle(yr*).

In the seminal papers, the time dummies are always included as:

(2) y l.y yr*, robust small gmmstyle(y) ivstyle(yr*, eq(level)).

I do not understand the reason for that, because the time dummies do not disappear in the First-Difference equation (they range from -1 to 1 now, which is no problem as the relative range is the same as before). Therefore, in the second approach (as far as I do understand) the time dummies do not belong to the instrument matrix in the FD-equation and they are treated as endogenous. Is this interpretation right? And why isn't it better to use the first approach?

Thanks you!

Best regards

I am using the System GMM approach for estimation and I want to introduce time dummies as well. For example as:

(1) y l.y yr*, robust small gmmstyle(y) ivstyle(yr*).

In the seminal papers, the time dummies are always included as:

(2) y l.y yr*, robust small gmmstyle(y) ivstyle(yr*, eq(level)).

I do not understand the reason for that, because the time dummies do not disappear in the First-Difference equation (they range from -1 to 1 now, which is no problem as the relative range is the same as before). Therefore, in the second approach (as far as I do understand) the time dummies do not belong to the instrument matrix in the FD-equation and they are treated as endogenous. Is this interpretation right? And why isn't it better to use the first approach?

Thanks you!

Best regards

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