Bruce E. Hansen and Seojeong Lee

Inference for Iterated GMM Under Misspecification
Econometrica (2021), 89, 1419-1447


This paper develops inference methods for the iterated over-identified Generalized Method of Moments (GMM) estimator. We provide conditions for the existence of the iterated estimator, and an asymptotic distribution theory which allows for mild misspecification. Moment misspecification causes bias in conventional GMM variance estimators which can lead to severely over-sized hypothesis tests. We show how to consistently estimate the correct asymptotic variance matrix. Our simulation results show that our methods are properly sized under both correct specification and misspecification. We illustrate the method with an application to the model of Acemoglu, Johnson, Robinson, and Yared (2008).

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Some of the above material is based upon work supported by the National Science Foundation under Grants No. SES-9022176, SES-9120576, SBR-9412339, and SBR-9807111. Any opinions, findings, and conclusions, or recommendations expressed in this material are those of the author(s), and do not necessarily reflect the views of the NSF.