Question: In this exercise you will replicate and extend the empirical work reported in Arellano and Bond (1991) and Blundell and Bond (1998). Arellano-Bond gathered a

In this exercise you will replicate and extend the empirical work reported in Arellano and Bond (1991) and Blundell and Bond (1998). Arellano-Bond gathered a dataset of 1031 observations from an unbalanced panel of 140 U.K. companies for 1976-1984 and is in the datafile AB1991 on the textbook webpage. The variables we will be using are log employment (N), log real wages (W), and log capital (K).

See the description file for definitions.

(a) Estimate the panel AR(1) Ki t Æ ®Ki t¡1Åui Åvt Å"i t using Arellano-Bond one-stepGMMwith clustered standard errors. Note that the model includes year fixed effects.

(b) Re-estimate using Blundell-Bond one-step GMM with clustered standard errors.

(c) Explain the difference in the estimates.

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