This exercise uses the same dataset as the previous question. Blundell and Bond (1998)

estimated a dynamic panel regression of log employment N on log real wages W and log capital K. The following specification1 used the Arellano-Bond one-step estimator, treatingWi ,t¡1 and Ki ,t¡1 as predetermined.

This equation also included year dummies and the standard errors are clustered.

(a) Estimate (17.114) using the Arellano-Bond one-step estimator treating Wi t and Ki t as strictly exogenous.

(b) Estimate (17.114) treatingWi ,t¡1 and Ki ,t¡1 as predetermind to verify the results in (17.114). What is the difference between the estimates treating the regressors as strictly exogenous versus predetermined?

(c) Estimate the equation using the Blundell-Bond one-step systems GMMestimator.

(d) Interpret the coefficient estimates viewing (17.114) as a firm-level labor demand equation.

(e) Describe the impact on the standard errors of the Blundell-Bond estimates in part

(c) if you forget to use clustering. (You do not have to list all the standard errors, but describe the magnitude of the impact.)

Nit .7075 Ni,t-1 .7088 Wit+ .5000 Wit-1+ .4660 Kit (.1171) (.0842) (.1113) (.1010) .2151 Ki,t-1. (.0859) (17.114)