| Summary: | The dynamic panel data model with covariates is based on the concept of
dynamics, when a variable is not only determined by other variables at the same
time, but also determined by the variables in the previous time. The dynamic model
contains lagged dependent variable, that correlated with the error term, as an explanatory variable. It causes the Ordinary Least Square (OLS) estimator is biased
and inconsistent. Therefore, other estimation methods are needed, one of them is
the Arellano-Bond method. This method is based on the Generalized Method of
Moments (GMM), and produces an unbiased, consistent, and efficient estimator.
As an application, a case study will be conducted on the effect of Direct Expenditure in the previous time, District Own Source Revenue, and General Allocation
Fund on Direct Expenditure in the districts on the Java Island.
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