System GMM estimation with a small sample

• Authors: Marcelo Soto.
• BSE Working Paper: 395 | September 15
• Keywords: economic growth , System GMM estimation , Monte Carlo Simulations
• JEL codes: C15, C33, O11
• economic growth
• System GMM estimation
• Monte Carlo Simulations

Properties of GMM estimators for panel data, which have become very popular in the empirical economic growth literature, are not well known when the number of individuals is small. This paper analyses through Monte Carlo simulations the properties of various GMM and other estimators when the number of individuals is the one typically available in country growth studies. It is found that, provided that some persistency is present in the series, the system GMM estimator has a lower bias and higher efficiency than all the other estimators analysed, including the standard first-differences GMM estimator.