The Asymptotic Properties of the System GMM Estimator in Dynamic Panel Data Models When Both N and T are Large

This paper complements Alvarez and Arellano (2003) by showing the asymptotic properties of the system GMM estimator for AR(1) panel data models when both N and T tend to infinity. We show that the system GMM estimator with the instruments which Blundell and Bond (1998) used will be inconsistent when both N and T are large. We also show that the system GMM estimator with all available instruments, including redundant ones, will be consistent if σ η 2 /σ v 2 = 1-α holds.