Consistent Estimation of Dynamic Panel Data Models With Cross-sectional Dependence

This paper proposes new moment estimators for autoregressive panels with cross-sectional dependence. In particular, for each unit i the proposed estimators make use of instruments with respect to another cross-section, unit j, rather than with respect to lagged values of the endogenous regressor (either in levels or in \u85rst-di¤erences) of unit i itself. This is a rather di¤erent approach compared to the conventional one applied in the dynamic panel literature. The resulting estimators are asymptotically valid when the time dimension of the panel is \u85xed. The \u85nite-sample evidence of the Monte Carlo experiments suggests that the new moment estimators are by far superior in terms of bias and RMSE compared to the existing ones, under cross-sectional dependence in the error process. Key Words: dynamic panel data, cross-sectional dependence, generalised method of moments, Sargans test