time dummies always should be included in iv part in xtabond2?

[Sang Won Han]

I am now trying to implement xtabond2 for my panel data set spanning from 1998 to 2020. The issue that I have regarding xtabond2 routine is whether I need to include all the independent variables (including time dummies) into either "iv" or "gmm" part. To be specific, let's say that I have one dependent variable and four independent (three endogenous and one exogeneous) and time dummies for 5 years. Then, the usual xtabond2 command should be as follows:

xtabond2 y L.y a b c d i.fyear, gmm(L.y a b c) iv(d i.fyear), robust twostep


But then my question is whether I can exclude some of the independent variables from "iv" or "gmm" part like:

xtabond2 y L.y a b c d i.fyear, gmm(L.y b c) iv(d), robust twostep


Thank you in advance and look forward to hearing from you soon.

[Jeff Wooldridge]

Because you are including time dummies in the main ("structural") equation, they need instruments. I can't think of a reason why they aren't there own IVs. So the first command is correct. I'm not even sure what the second command would do, but it's probably instrumenting for the year dummies using lags of the variables in gmm(). You don't want this. The bottom line is, the year dummies need to be their own IVs.