In estimating the model differenced generalized method-of-moments (GMM) or system
GMM were not used because consistency of results using these methodologies depends
crucially on having a large number of cross-sectional units, regardless of the number of timeseries
observations; our sample by contrast has only eight cross-sectional observations and a
relatively large number of time periods. On the other hand, standard fixed effects estimation
yields estimates of the coefficient on the lagged dependent variable that are biased
downwards, although Nickell (1981) has shown that the estimates are consistent and that the
size of the bias gets smaller as T (the number of time periods) increases. We instead estimate
the model—which incorporates country-specific dummy variables—using GMM-IV
(General Method of Moments with instrumental variables) since this methodology gives us
coefficient estimates that are corrected for endogeneity, heteroskedasticity and
autocorrelation.3 Lagged values of the endogenous variables and of the dependent variable
were used as instruments.