Panel GMM Research Articles

Implementing a Strategy to Reduce the Instrument Count in Panel GMM

The problem of instrument proliferation and its consequences—overfitting of the endogenous explanatory variables, biased instrumental-variables and generalized method of moments estimators, and weakening of the power of the overidentification tests—are well known. This article introduces a statistical method to reduce the instrument count. Principal component analysis is applied on the instrument matrix, and the principal-component analysis scores are used as instruments for the panel generalized method of moments estimation. This strategy is implemented through the new command pca2.

Modelling optimal instrumental variables for dynamic panel data models

This paper considers a new two-stage instrumental variable estimator of panel data models with predetermined or endogenous explanatory variables. The instruments are fitted values from period-specific first-stage equations based on all available lags, which are similar to those in standard GMM estimation. The difference is that first-stage fitted values are not unrestricted but are chosen to satisfy the constraints implied by a VAR process with random effects. As a result the number of free first-stage parameters is dramatically reduced, while retaining predictive power from all lags. The estimators are asymptotically efficient when the VAR restrictions hold, but remain consistent if they do not. Since the instruments are parameterized using a fixed number of coefficients for any value of T, the properties of the resulting estimators are not fundamentally affected by the relative dimensions of T and N, contrary to standard panel GMM. Empirical illustrations are reported using firm- and country-level panel data.

Impacts of climate change, agroecology and socio-economic factors on agricultural land use diversity in Bangladesh (1948–2008)

The paper examines the impacts of climate change, agroecology and socio-economic factors on agricultural land use diversity (ALUD) using a panel data of 17 regions of Bangladesh covering a 61 year period (1948–2008) by applying a dynamic panel GMM estimator. Results revealed that ALUD and total rainfall have actually increased @ 0.19% and 0.02% per year whereas variability in temperature has declined @ 0.06% with significant differences across agroecological zones (AEZs). Among the climatic factors, total rainfall significantly increases ALUD. ALUD is also significantly influenced by agroecological characteristics. ALUD is significantly higher in Ganges River Floodplains but lower in Meghna River Floodplains and Chittagong Coastal Plain. Among the socio-economic factors, ALUD increases significantly with increase in the prices of vegetables, jute and phosphate fertilizer and R&D investment. ALUD significantly decreases with increase in the prices of lentil, onion, sugarcane, nitrogen and potassium fertilizers and extension expenditure. Policy implications include price policies to improve vegetable and jute prices, stabilise/reduce fertilizer prices and investments in R&D to develop crops that are suitable for high rainfall areas as well as specific AEZs in order to promote ALUD in Bangladesh.

Effects of Institutional Quality on FDI in Provinces of Vietnam: Empirical Evidence Based on Differenced Panel GMM

Foreign direct investment (FDI) has been strongly affecting the world economy during the past years and is a critical topic for both developing and developed countries. Most countries, particularly developing ones, always attempt to adjust and modify appropriate policies and institutions to attract FDI inflows. In the context of Vietnam, does the institutional quality have any effect on attracting FDI inflows in provinces? To answer clearly and exactly this question, the impact of institutional quality on attracting FDI inflows is empirically investigated in a sample of 43 provinces of Vietnam over the period of 2005–2012 via the estimation technique of difference panel GMM. Estimated results indicate that in the total sample of all provinces the institutional quality has significantly positive effects on the FDI flows. However, in the sub-sample of provinces the impact of the institutional quality on attracting FDI inflows in Northern and Southern regions are statistically significant while that in Central region is not.

Effects of Institutional Quality on FDI inProvinces of Vietnam:Empirical Evidence Based on Differenced Panel GMM

Effects of Institutional Quality on FDI inProvinces of Vietnam:Empirical Evidence Based on Differenced Panel GMM

Financial Inclusion and Per Capita Real GSP Growth across Fifty US States and the District of Columbia: Evidences from Panel Cointegration and GMM Estimates

Financial Inclusion and Per Capita Real GSP Growth across Fifty US States and the District of Columbia: Evidences from Panel Cointegration and GMM Estimates

Financial Development and Economic Growth in Sub-Saharan Africa: A Dynamic Panel Data Analysis

Financial Development is the accumulation of financial assets at a rate that is more rapid than the rate of non-financial assets accumulation. Economic growth is the evolution of gross domestic product (GDP) in the short, medium and long terms. We have attempted in this paper to analyze and to verify empirically the controversy on the relationship between the financial sphere and the real sphere. From the data observed on 21 Sub-Saharan African (SSA) countries and by using the dynamic panel GMM technique, we were able to show that there exists a positive link between financial development and economic growth. This link is intense for the issue of the financial system in the space of Sub-Saharan Africa. However, an outcome highlighting an eventual link between foreign direct investment and economic growth is opportune. Keywords: Real sphere – Financial sphere – Dynamic panel GMM – Sub-Saharan Africa.

CEO power, ownership structure and pay performance in Chinese banking

This paper examines the determinants of executive compensation in Chinese banking during 2005–2012. Using the fixed effects panel, 2SLS and dynamic GMM regressions, I find that there is no significant positive pay performance relation, and CEO power does not necessarily exhibit higher levels of executive compensation. However, I show that ownership structure (measured by ownership concentration and ownership identification) and compensation committee are significant in determining executive compensation in Chinese banking. It suggests that government may ensure efficient monitoring functions when the pay incentive is ineffective. The results have important implication on bank regulation and corporate governance in emerging markets.

Financial Reforms and Financial Fragility: A Panel Data Analysis

This paper explores the relationship between financial reforms, financial liberalization and the quality of banking regulation and supervision for financial fragility by applying a dynamic two-step system generalized method of moments GMM panel estimator technique. The finding of this study is that the financial vulnerability of the banking sector could be affected, not only by bank-specific and macro-specific variables; but also by financial liberalization and banking regulations and supervision policies. The empirical results of this study confirm the evidence that financial reforms and financial liberalization significantly enhance the likelihood of financial fragility while strong banking regulations and supervision have an inverse relationship with financial fragility. The results of this study also explain that the lag value of loan growth and unemployment contribute to enhancing financial fragility while equity to assets ratio, natural log of total assets and share of foreign banks reduce financial vulnerability.

English

In spite of a large increase in FDI inflows to developing countries, the effect of FDI flows on economic growth remains confusing. The recent contribution of modern economic growth theories in general predicts that FDI can be the main catalyst of economic growth in the receiving countries. Empirical studies, however, produce ambiguous results, and suggest that the growth effects of FDI are conditional on the host country characteristics. The main purpose of this paper is to examine the growth-effect of FDI in a selected sample from developing countries from 1970 to 2005. Particularly, the paper examines the following specific research question: Does FDI contribute to economic growth in developing countries alone or does it depend on its initial conditions? By applying GMM panel data technique, the paper finds that that FDI has in general a positive impact on economic growth, but its magnitude depends on the host country conditions to achieve a economic growth and sustainable development. The results of this paper clearly show that domestic investment, human capital, infrastructure development, financial market development, trade openness and institution quality positively related to economic growth. The results also show that the technology gap is negatively related to economic growth Key words: Foreign direct investment, absorptive capacity, economic growth, GMM panel data framework, developing countries.

The Effect of Patent Laws on Economic Growth: Evidence from Cross- Country Panels during 1600-1913

There has been surprisingly little empirical study about the effect of patent laws per se on economic growth. Using a historical panel data of the US and 14 Western European countries during 1600-1913, we estimate a significant positive effect of patent laws on economic growth in different specifications of fixed effects, random effects, time effects, dynamic panel GMM and differences-in-differences models. The results are robust to inclusion of “constraint on executive”, exclusion of the UK and US, and using urbanization ratio as a proxy for GDP per capita.

A comparative analysis of export diversification in resource rich and non-resource rich countries

This paper compared the extent and factors that drive export diversification in resource rich and non-resource rich countries. The three methods of measuring the extent of export diversification: vertical, horizontal and Herfindahl index of export concentration were employed to examine the extent of export diversification. GMM panel analysis was used to estimate the determinants of export diversification. It was found that the non-resource rich countries fared better compared to the resource rich countries in export diversification drive. While foreign direct investment promotes export diversification in the non-resource countries, it however reduces it in the resource rich countries. Domestic investment was found to promote export diversification in all the countries. Per capita income increases export diversification in non-resource countries but does not in resource rich countries. Resource endowment reduces export diversification in non-resource rich countries. Exchange rate decreases export diversification in resource rich countries, while it has no impact in the non-resource rich countries. No evidence is found for the impact of openness on export diversification. Both time to export and cost of export decrease export diversification in both resource rich and non-resource rich countries.

Technical Efficiency and Technical Change in Canadian Manufacturing Industries

This study applies the “true fixed effects” panel stochastic frontier methodology to the Canadian KLEMS data set to estimate technical change and technical efficiency in the Canadian manufacturing sector. To account for the endogeneity of capital inputs as well as the possible problems related to omitted variables, a two-stage residual inclusion method is pursued. The first stage is estimated using the dynamic panel GMM method. The results show that Canadian manufacturing industries experienced significant declines in technical efficiencies during the last ten years. This suggests that the observed slowdown in TFP growth during the recent past is partly due to declining technical efficiency.

How bank competition influences liquidity creation

This paper evaluates the effect of bank competition on liquidity creation by banks. Thus, we contribute to the literature on both bank competition and the determinants of liquidity creation by banks. To explore this relationship, we conduct dynamic GMM panel estimations on a dataset of Czech banks from 2002 to 2010. We find that enhanced competition reduces liquidity creation, a finding we observe under different specifications, including alternative measures of liquidity creation. We explain this finding in terms of the impact of increased bank competition on the financial fragility of banks, which leads banks to reduce their lending and deposit activities. The evidence suggests that pro-competitive policies in the banking industry can reduce liquidity provision by banks.

The Bank Lending Channel of Monetary Policy? The Panel Evidence from Egypt

This paper examines the relevance of the bank lending channel of monetary policy in Egypt using bank-level data. Previous empirical studies in Egypt that used macro-level data have not supported the relevance of the bank lending channel. However, using a sample of 32 commercial banks for the period from 1998 until 2011 and a dynamic panel GMM technique, the empirical findings revealed the relevance of the bank lending channel of monetary policy in Egypt. Moreover, there is a heterogeneity effect of monetary policy on bank loans according to bank size, in which the small banks are more affected during a monetary contraction than larger banks. This finding signals that the monetary authorities in Egypt should take cognizance of the stability of interest rates in order to stabilize the bank loan supply.

Financial stability and economic performance

This paper aims at establishing the link between economic performance and financial stability in the European Union. We use the seminal framework of Beck and Levine (2004) – both in terms of variables and econometric method – to estimate this causal relationship, independently from but controlling for the level of financial depth. Using a panel GMM with instrumental variables, our contribution involves testing how different measures of financial instability (an institutional index, microeconomic indicators, and our own statistical index derived from a principal component analysis) affect economic performance (or components of aggregate dynamics like consumption, investment and disposable income). We find that financial instability has a negative effect on economic growth.

Systemic competitiveness of post-socialist and capitalist economies: a broader look at the competitiveness debate

International competitiveness studies have hitherto mainly been focused on constructing ranking schemes. This article adds to the literature by analysing World Competitiveness Yearbook data in order to econometrically pinpoint the crucial competitiveness determinants for 35 countries. Applying the system GMM panel data estimator to post-socialist (PS) and capitalist countries separately, several conclusions emerge: i) small and medium enterprises are the main competitiveness generator in the PS block (in contrast to large corporations in the capitalist economies), ii) credit rating is highly relevant in both groups, iii) increasing labour market flexibility in PS countries plays a vital role in boosting competitiveness.

The Knowledge Economyy-Finance Nexus in SSA and MENA Countries

Purpose – This paper assesses dynamics of the knowledge economy (KE)-finance nexus using the four variables identified under the World Bank’s knowledge economy index (KEI) and seven financial intermediary dynamics of depth, efficiency, activity and size.Design/methodology/approach – Principal Component Analysis is used to reduce the dimensions of KE components before dynamic panel GMM estimation techniques are employed to examine the nexuses. Findings – Four main findings are established. (1) Education improves financial depth and financial efficiency but mitigates financial size. (2) But for a thin exception (trade’s incidence on money supply), economic incentives (credit facilities and trade) are not consistently favorable to financial development. (3) ICT improves only financial size and has a negative effect on other financial dynamics. (4) Proxies for innovation (journals and FDI) have a positive effect on financial activity; journals (FDI) have (has) a negative (positive) effect on liquid liabilities and; journals and FDI both have negative incidences on money supply and banking system efficiency respectively.Practical Implications – As a policy implication, the KE-finance nexus is a complex and multidimensional relationship. Hence, blind and blanket policy formulation to achieve positive linkages may not be successful unless policy-making strategy is contingent on the prevailing ‘KE specific component’ trends and dynamics of financial development. Policy makers should improve the economic incentive dimension of KE that overwhelmingly and consistently deters financial development, owing to surplus liquidity issues.Originality/value – As far as we have reviewed, this is the first paper to examine the KE-finance nexus with the plethora of KE dimensions defined by the World Bank’s KEI and all the dynamics identified by the Financial Development and Structure Database (FDSD).

How effective are countercyclical policy tools in mitigating the impact of financial and economic crises in Africa?

Using panel vector auto regression (PVAR) and GMM estimates we provide evidence for the transmission of financial crises to African economies through foreign direct investments and exports. Although many countries resort to stimulus packages to mitigate the impacts of financial crises, we find no evidence for fiscal policy to be considered an effective countercyclical policy tool in the African context. Monetary policy could be an effective tool in mitigating the impact in non-resource rich SSA countries, but not in others. Limited policy space calls for African economies to reconsider their policies towards trade, investment, finance and macroeconomic management.

Do Workers’ Remittances Promote Financial Development in Sub-Sahara Africa Countries?

This study examines the impact of workers’ remittances on financial development in 32 Sub-Sahara Africa countries. In this paper we employ dynamic panel GMM model to study the potential effect of remittances on financial development with emphasis on financial intermediation. While the study depends on credit to private sector as a measure of financial development, past level of financial development, inflation, globalisation, FDI, size of government economic and worker remittances were controlled for. Employing data from 1996 -2010, the study discovers that workers’ remittances affect financial development in a positive and significant way. This positive relationship suggests that remittances complements financial intermediation in SSA countries as exemplified by endogenous growth literature and the canonical intermediating model with the insights that remittances savings behaviour will generally influence equilibrium financial rates.