Dynamic Panel Model

Most of the economic relationships involve dynamic adjustment processes. Dynamic model in panel data framework is very much popular in labour economics, development economics, and, in general, macroeconomics. The inclusion of lag-dependent variable as a regressor provides dynamic adjustment in an econometric model. By construction, however, the lagged dependent variable is correlated with the cross section specific effect and the problem of endogeneity appears. This endogeneity issue suggests that least squares based estimators may be inconsistent. The use of Instrumental Variables (IV) methods or the Generalised Method of Moments (GMM) produces consistent parameter estimates for the data with finite time periods and large cross section dimension. Among them the system GMM estimator has become increasingly popular. This is because it provides asymptotically efficient inference by using minimal set of statistical assumptions. This chapter focuses on these issues of dynamic panel data model.