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Which one shall we use for linear dynamic panel models: GMM or IV?

Yonghui Zhang, Qiankun Zhou

In this paper, we consider the estimation of dynamic panel data models. We establish the equivalence of the GMM estimator proposed by Alvarez and Arellano, which is based on the forward differenced model using all lagged variables as instruments, and the double filter instrumental variables estimator (DIV for short) proposed by Hayakawa, which uses the backward differenced lags as instruments. Since the DIV estimator is asymptotically unbiased, thus we suggest using the DIV estimator for estimation of dynamic panel models. Monte Carlo simulations confirm our findings in this paper.