[Sebastian Kripfganz]

As long as you do not change the second equation, my earlier statement about X_it being predetermined still stands.

Once X_it becomes a direct function of Y_it, as in your amended second equation, X_it becomes endogenous.

[Nursena Sagir]

Dear Sebastian,

Is there any reference that I can understand this better and explain why I can treat X_it as predetermined? I had difficulties to explain it in the method section of my paper. Or can you elaborate more on your reasoning?

Best regards,
Nursena

[Sebastian Kripfganz]

Any standard econometrics textbook should cover systems of simultaneous equations and regressor endogeneity.

A variable is predetermined if it is a function of (i.e., determined by) previous periods' shocks to the equation of interest (but not current or future periods' shocks).

[Nicu Sprincean]

Sebastian Kripfganz

Hi, Sebastian,

I have a question regarding a model specification where a I include the second lag of the dependent variable to deal with serial correlation. The model takes the following form:

xtdpdgmm DV l(1/2).DV l.IV l.(controls),  gmm(l(1/2).DV, lag(0 0) collapse m(fodev)) gmm(l.IV, lag(0 3) collapse m(fodev)) iv(l.(controls),d m(level)) teffects two vce(robust) nocons

I assume that l.DV and l.IV are both predetermined - all right-hand side variables enter the model with a one-year lag, due to economic reasons, and all controls to be strictly exogeneous. I am not sure whether

gmm(l(1/2).DV, lag(0 0) collapse m(fodev))

and

iv(l.(controls),d m(level))

are correctly specified.

Thank you in advance for your response!

[Sebastian Kripfganz]

There is nothing wrong with these instruments per se. It is just a bit unusual that you are using different lag orders to instrument the lagged dependent variables and the independent variable. You should make sure that this can be justified; otherwise it looks like cherry picking a model specification that delivers the nicest results.

For the controls, it is also unusual to not specify instruments for the transformed model; e.g., iv(l.(controls), m(fodev)).

As a technical comment, note that gmm(l(1/2).DV, lag(0 0) collapse m(fodev)) is equivalent to iv(l(1/2).DV, m(fodev)).