The PANEL Procedure

INSTRUMENTS Statement

INSTRUMENTS options ;

The INSTRUMENTS statement denotes which variables are used in the moment condition equations of the dynamic panel estimator. The following options can be used with the INSTRUMENTS statement.

CONSTANT: includes an intercept (column of ones) as an uncorrelated exogenous instrument.
CORRELATED=(variable, variable, …, variable): specifies a list of variables correlated with the unobserved individual effects. These variables are correlated with the error terms in the level equations so they are not used in forming moment conditions from those equations.
DEPVAR<(LEVEL | DIFF | DIFFERENCE | BOTH )>: specifies instruments related to the dependent variable. With LEVEL, the lagged dependent variables are included as instruments for differenced equations. With DIFFERENCE, the differenced dependent variable is included as instruments for equations. With BOTH or nothing specified, both level and differenced dependent variables are included in the instrument matrix.
EXOGENOUS=(variable, variable, …, variable): specifies a list of variables that are not correlated with the disturbances given the unobserved individual effects.
PREDETERMINED=(variable, variable, …, variable): specifies a list of variables whose future realizations can be correlated with the disturbances but whose present and past realizations are not conditional on the individual effects.

Because a variable can be used as an instrument only if it is either exogenous or predetermined, the variables listed in the CORRELATED= option must be included in either the EXOGENOUS= list or the PREDETERMINED= list. If a variable listed in the EXOGENOUS= list is not included in the CORRELATED= list, then it is considered to be uncorrelated to the error term in the level equations, which consist only of the individual effects and the disturbances. Moreover, it is uncorrelated with the error term in the differenced equations, which consist only of the disturbances. For example, in the following statements, the exogenous instruments are Z1, Z2 and X1. Because Z1 is an instrument that is correlated to the individual fixed effects, it is included in the level equations but not in the differenced equations. Because Z2 is not correlated with either the individual effects or the disturbances, it is included in both the level equations and the differenced equations.

   proc panel data=a;
      inst exogenous=(Z1 Z2 X1)
        correlated = (Z1) constant depvar;
       model Y = X1 X2 X3 / gmm1;
   run;

For a detailed discussion of the model set up and the use of the INSTRUMENTS statement, see Dynamic Panel Estimator.

Note that for each MODEL statement, one INSTRUMENT statement is required. In other words, if there are two models to be estimated by using GMM1 within one PANEL procedure, then there should be two INSTRUMENT statements. For example,

    proc panel data=test;
      inst depvar pred=(x1 x2) exog=(x3 x4 x5) correlated=(x3 x4 x5);
      model y = y_1 x1 x2 / gmm1 maxband=6 nolevels ginv=g4 artest=5;
      inst pred=(x2 x4) exog=(x3 x5) correlated=(x3 x4);
      model y = y_1 x2 / gmm1 maxband=6 nolevels ginv=g4 artest=5;
      id cs ts;
    run;