Dear everyone,

I have a doubt with respect to the need of first differencing the variables cointaining unit root before estimating a model using System GMM with xtabond2.

According to the Im-Pesaran-Shin test results (xtunitroot ips), some of the variables in the model I want to estimate are I(1) and some others are stationary. There is also another potential regressor, population density, which is I(2).

Would it be correct to include the I(2) variable first differenced twice, the I(1) variables in first differences and the stationary ones in levels?
Or since GMM uses the first differences it is not necessary to compute the first differences for the I(1) variables? Therefore to include the I(0) and the I(1) variables in levels (and only to first difference once the I(2) variables if included)(?)

If it is informative, I must say that the panel dimensions are N=170 and T=21, so a quite long time dimension. I use the collapse option of xtabond2 in order to minimize the proliferation of instruments.

Thank you very much for any comment and help.

Laura