The PANEL Procedure |

Instrument Choice |

Arellano and Bond’s technique is a very useful method for dealing with any autoregressive characteristics in the data. However, there is one caveat to consider. Too many instruments bias the estimator to the within estimate. Furthermore, many instruments make this technique not scalable. The weighting matrix becomes very large, so every operation that involves it becomes more computationally intensive. The PANEL procedure enables you to specify a bandwidth for instrument selection. For example, specifying MAXBAND=10 means that at most there will be ten time observations for each variable entering as an instrument. The default is to follow the Arellano-Bond methodology.

In specifying a maximum bandwidth, you can also specify the selection of the time observations. There are three possibilities: leading, trailing (default), and centered. The exact consequence of choosing any of those possibilities depends on the variable type (correlated, exogenous, or predetermined) and the time period of the current observation.

If the MAXBAND option is specified, then the following is true under any selection criterion (let be the time subscript for the current observation). The first observation for the endogenous variable (as instrument) is max and the last instrument is . The first observation for a predetermined variable is max and . The first and last observation for an exogenous variable is given in the list below.

*Trailing*: If , then the first instrument is for the first time period and the last observation is . Otherwise, if , then the first observation is , while the last instrument to enter is .*Centered*: If , then the first observation is the first time period and the last observation is . If , then the first instrument included is the and the last observation is . If , then the first included instrument is and the last observation is . If the value is an odd number, the procedure decrements by one.*Leading*: If , then the first instrument corresponds to time period , while the last observation is . Otherwise, if , then the first observation is and the last observation is .

The PANEL procedure enables you to include dummy variables to deal with the presence of time effects not captured by including the lagged dependent variable. The dummy variables directly affect the level equations. However, this implies that the difference of the dummy variables for dummy variable of time period and enters the difference equation. The first usable observation occurs at . If the level equation is not used in the estimation, then there is no way to identify the dummy variables. Selecting the TIME option gives the same result as that which would be obtained by creating dummy variables in the data set and using those in the regression.

The PANEL procedure gives you several options when it comes to missing values and unbalanced panel. By default, any time period for which there are missing values is skipped. The corresponding rows and columns of matrices are zeroed, and the calculation is continued. Alternatively, you can elect to replace missing values and missing observations with zeros (ZERO), the overall mean of the series (OAM), the cross-sectional mean (CSM), or the time series mean (TSM).

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