Reason
of applying GMM (Generalized Method of Moments)
If
the problem of endogeneity exists in data, then we apply Generalized Method of
Moments. We distinguish three types of
variables. We know of endogenous variables, instrumented variables and external
variables. The instrumental variable is very important and one of the greatest
challenges is to choosing the right instrument. Now we say that the core issue
here about panel data analysis is installation, where by the supposed dependent
and independent variables may be weekly journals, meaning that the variables
may be correlated with present and past realizations of the error time. we talk
about endogenous variables, instrumental variables and another thing to also note
is that the eggs are not variables, or among the regressors we may also have purely
exudes variables, endogenous variables and predetermined variables now
predetermined variables are the like value of the dependent variable Y purely exogenous
variable may be variables in the regression that are purely Exiles.
Endogenous variables are variables that are correlated with
the error term and of course also remember that this is the dynamic model
whereby the predetermined variable which is the light value of the regular the
pandemic variable is predominantly correlated with the error term. Now what we do
when we are faced with this kind of a situation. The first thing to do is to go
into the search for instrumental variable. How we determine the right
instruments an instrumental variable should be purely a genius and it must be
relevant such that it greatly determines and it totally influences the
regression in question.
The regressor in question, for instance, one may be
interested in looking at how investment affects the economy. Now if you are looking at how investment
affect the economy you may have to look at what variable directly affects
investment but it is not included in the
analysis the variable that we can use theoretically, because this is a
theoretical issue. Now we may have to guide you in selecting the instrument. If
you look further theoretically, the major determinant of investment is interest
rate in conventional economies so the major determinant of investment is interest
rate now if you are looking at impact of investment on economic growth you may
have to see interest rate as the instrument in order to be able to use instrument
investment, because investment can also be eternal and endogenous variable.
·
In GMM
(Generalized Method of Moments) T should be small and N large. If T large and N
small, the problem of biasness will be appear.
·
GMM
also controls omitted variables biasness
·
GMM
controls unobserved heterogeneity in panel
·
GMM
controls measurement errors
Dynamic panel GMM
In dynamic panel GMM, the lag of dependent variable use as an instrument variable.
First of all select dependent variable reer
(real effective exchange rate) and then select independent variables. After
selecting the dependent variable put figure on ctrl.
Right click-open- as Equation
After that select GMM method and put lag of dependent variable.
Go on instrument tab and put equation on it with lag of dependent variable- ok
Generalized
Method of Moment (GMM) results shows that the estimated value
of FDI is significant and shows a positive relationship between FDI and REER.
Its value of .311050 implies
that a 1 unit increase in the FDI lead to increase the .311050 units in REER.
Interpret all variables like this. Value of R square is 80 which shows model is
good fit 80 %.
Difference GMM (Generalized Method of Moments)
Reason of applying GMM (Generalized Method of Moments)
Difference GMM solve the problem of endogeneity by: first one is transforming all regressors thru differencing and second one is removes fixed effects.
Set equation in specification and put instrument variable in instruments then Click on dynamic panel wizard-ok
At last click on Finish and then ok
Results
If prob value of a variable is less than 0.05 which
indicates that variable is significant statistically. Results show that the estimated value of FDI is significant
and shows a positive relationship between FDI and REER. Its value of .545139 implies that a 1
unit increase in the FDI lead to increase the .545139 units in REER.
Interpret all variables like this.