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  • Regional dummies and interactions in xtabond2 two-step GMM

    Dear All,

    I am having an issue with using regional dummies in a two-step gmm procedure with xtabond2. Without the regional dummies, the results seem fine and in-line with what is found in the literature. However, when I include regional dummies and interactions, I get odd results. Is there something wrong with the code that I used?

    Without dummy variables, and using:
    Code:
    xtabond2 grlhcountglob grlmedinc, twostep gmm(lmedinc, lag(2 .) collapse) small robust
    I get the following:

    Dynamic panel-data estimation, two-step system GMM
    ------------------------------------------------------------------------------
    Group variable: country Number of obs = 1152
    Time variable : year Number of groups = 112
    Number of instruments = 33 Obs per group: min = 1
    F(1, 111) = 17.74 avg = 10.29
    Prob > F = 0.000 max = 29
    ------------------------------------------------------------------------------
    | Corrected
    grlhcountg~b | Coef. Std. Err. t P>|t| [95% Conf. Interval]
    -------------+----------------------------------------------------------------
    grlminc | -2.60158 .6177417 -4.21 0.000 -3.825676 -1.377483
    _cons | .0160054 .0249184 0.64 0.522 -.0333721 .065383
    ------------------------------------------------------------------------------
    Instruments for first differences equation
    GMM-type (missing=0, separate instruments for each period unless collapsed)
    L(2/32).lminc collapsed
    Instruments for levels equation
    Standard
    _cons
    GMM-type (missing=0, separate instruments for each period unless collapsed)
    DL.lminc collapsed
    ------------------------------------------------------------------------------
    Arellano-Bond test for AR(1) in first differences: z = -3.65 Pr > z = 0.000
    Arellano-Bond test for AR(2) in first differences: z = 1.07 Pr > z = 0.285
    ------------------------------------------------------------------------------
    Sargan test of overid. restrictions: chi2(31) = 17.48 Prob > chi2 = 0.976
    (Not robust, but not weakened by many instruments.)
    Hansen test of overid. restrictions: chi2(31) = 34.22 Prob > chi2 = 0.316
    (Robust, but weakened by many instruments.)

    Difference-in-Hansen tests of exogeneity of instrument subsets:
    GMM instruments for levels
    Hansen test excluding group: chi2(30) = 33.71 Prob > chi2 = 0.292
    Difference (null H = exogenous): chi2(1) = 0.51 Prob > chi2 = 0.477

    When using dummy variables with the code:
    Code:
    xtabond2 grlhcountglob c.grlminc##i.(eap eca lca mena sa ssa), twostep robust small gmm(c.lminc#i.(eap eca lca mena sa ssa), lag(2 10) collapse) iv( eap eca lca mena sa ssa, equation(level))
    I get the following result:

    Favoring space over speed. To switch, type or click on mata: mata set matafavor speed, perm.
    Warning: Two-step estimated covariance matrix of moments is singular.
    Using a generalized inverse to calculate optimal weighting matrix for two-step estimation.
    Difference-in-Sargan/Hansen statistics may be negative.

    Dynamic panel-data estimation, two-step system GMM
    ------------------------------------------------------------------------------
    Group variable: country Number of obs = 1152
    Time variable : year Number of groups = 112
    Number of instruments = 52 Obs per group: min = 1
    F(25, 111) = 4.11 avg = 10.29
    Prob > F = 0.000 max = 29
    --------------------------------------------------------------------------------
    | Corrected
    grlhcountglob | Coef. Std. Err. t P>|t| [95% Conf. Interval]
    ---------------+----------------------------------------------------------------
    grlminc | 49.83166 28.87619 1.73 0.087 -7.388451 107.0518
    |
    eap |
    0 | 0 (empty)
    1 | 6.888718 3.957638 1.74 0.085 -.9536063 14.73104
    |
    eca |
    0 | 0 (empty)
    1 | 6.977537 3.962253 1.76 0.081 -.8739327 14.82901
    |
    lca |
    0 | 0 (empty)
    1 | 7.027697 3.999272 1.76 0.082 -.8971276 14.95252
    |
    mena |
    0 | 0 (empty)
    1 | 6.821361 3.963337 1.72 0.088 -1.032257 14.67498
    |
    sa |
    0 | 0 (empty)
    1 | 7.015996 4.165934 1.68 0.095 -1.239081 15.27107
    |
    ssa |
    0 | 0 (empty)
    1 | 8.493254 6.202883 1.37 0.174 -3.798173 20.78468
    |
    eap#c.grlminc |
    0 | 0 (empty)
    1 | -50.19045 28.00473 -1.79 0.076 -105.6837 5.302786
    |
    eca#c.grlminc |
    0 | 0 (empty)
    1 | -50.40441 28.50497 -1.77 0.080 -106.8889 6.080084
    |
    lca#c.grlminc |
    0 | 0 (empty)
    1 | -51.13783 29.22885 -1.75 0.083 -109.0567 6.78108
    |
    mena#c.grlminc |
    0 | 0 (empty)
    1 | -50.83542 29.7939 -1.71 0.091 -109.874 8.203178
    |
    sa#c.grlminc |
    0 | 0 (empty)
    1 | -50.40036 27.55204 -1.83 0.070 -104.9966 4.195849
    |
    ssa#c.grlminc |
    0 | 0 (empty)
    1 | -42.59922 9.583961 -4.44 0.000 -61.59048 -23.60796
    |
    _cons | -7.029545 3.99622 -1.76 0.081 -14.94832 .8892326
    --------------------------------------------------------------------------------
    Instruments for first differences equation
    GMM-type (missing=0, separate instruments for each period unless collapsed)
    L(2/10).(0b.eap#c.lminc 1.eap#c.lminc 0b.eca#c.lminc 1.eca#c.lminc
    0b.lca#c.lminc 1.lca#c.lminc 0b.mena#c.lminc 1.mena#c.lminc 0b.sa#c.lminc
    1.sa#c.lminc 0b.ssa#c.lminc 1.ssa#c.lminc) collapsed
    Instruments for levels equation
    Standard
    eap eca lca mena sa ssa
    _cons
    GMM-type (missing=0, separate instruments for each period unless collapsed)
    DL.(0b.eap#c.lminc 1.eap#c.lminc 0b.eca#c.lminc 1.eca#c.lminc
    0b.lca#c.lminc 1.lca#c.lminc 0b.mena#c.lminc 1.mena#c.lminc 0b.sa#c.lminc
    1.sa#c.lminc 0b.ssa#c.lminc 1.ssa#c.lminc) collapsed
    ------------------------------------------------------------------------------
    Arellano-Bond test for AR(1) in first differences: z = -3.52 Pr > z = 0.000
    Arellano-Bond test for AR(2) in first differences: z = 0.53 Pr > z = 0.598
    ------------------------------------------------------------------------------
    Sargan test of overid. restrictions: chi2(26) = 57.65 Prob > chi2 = 0.000
    (Not robust, but not weakened by many instruments.)
    Hansen test of overid. restrictions: chi2(26) = 19.69 Prob > chi2 = 0.806
    (Robust, but weakened by many instruments.)

    Difference-in-Hansen tests of exogeneity of instrument subsets:
    GMM instruments for levels
    Hansen test excluding group: chi2(21) = 13.23 Prob > chi2 = 0.900
    Difference (null H = exogenous): chi2(5) = 6.46 Prob > chi2 = 0.264
    iv(eap eca lca mena sa ssa, eq(level))
    Hansen test excluding group: chi2(20) = 13.10 Prob > chi2 = 0.873
    Difference (null H = exogenous): chi2(6) = 6.59 Prob > chi2 = 0.361

    Would anyone be able to provide a recommendation on how to proceed with this issue?

    Thank you very much
    Last edited by Karun Advani; 12 Aug 2018, 08:25.
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