Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/105116
Authors: 
Kiviet, Jan Frederik
Feng, Qu
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper 5088
Abstract: 
While coping with nonsphericality of the disturbances, standard GMM suffers from a blind spot for exploiting the most effective instruments when these are obtained directly from unconditional rather than conditional moment assumptions. For instance, standard GMM counteracts that exogenous regressors are used as their own optimal instruments. This is easily seen after transmuting GMM for linear models into IV in terms of transformed variables. It is demonstrated that modified GMM (MGMM), exploiting straight-forward modifications of the instruments, can achieve substantial efficiency gains and bias reductions, even under mild heteroskedasticity. Feasible MGMM implementations and their standard er-ror estimates are examined and compared with standard GMM and IV for a range of typical models for cross-section data, both by simulation and by empirical illustration.
Subjects: 
efficiency
generalized method of moments
instrument strength
non-spherical disturbances
(un)conditional moment assumptions
JEL: 
C01
C13
C26
Document Type: 
Working Paper

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