A Simple Efficient Instrumental Variable Estimator in Panel AR(p) Models

In this paper, we show that for panel AR(p) models with iid errors, an instrumental variable (IV) estimator with instruments in the backward orthogonal deviation has the same asymptotic distribution as the infeasible optimal IV estimator when both N and T, the dimensions of the cross section and the time series, are large. If we assume that the errors are normally distributed, the asymptotic variance of the proposed IV estimator is shown to attain the lower bound when both N and T are large. A simulation study is conducted to assess the estimator.