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Modelling Time-Varying Parameters in Panel Data State-Space Frameworks: An Application to the Feldstein–Horioka Puzzle

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  • Mariam Camarero

    (Universitat Jaume I)

  • Juan Sapena

    (Catholic University of Valencia)

  • Cecilio Tamarit

    (University of Valencia)

Abstract

In this paper, we develop a very flexible and comprehensive state-space framework for modeling time series data. Our research extends the simple canonical model usually employed in the literature, into a panel-data time-varying parameters framework, combining fixed (both common and country-specific) and varying components. Under some specific circumstances, this setting can be understood as a mean-reverting panel time-series model, where the mean fixed parameter can, at the same time, include a deterministic trend. Regarding the transition equation, our structure allows for the estimation of different autoregressive alternatives, and include control instruments, whose coefficients can be set-up either common or idiosyncratic. This is particularly useful to detect asymmetries among individuals (countries) to common shocks. We develop a GAUSS code that allows for the introduction of restrictions regarding the variances of both the transition and measurement equations. Finally, we use this empirical framework to test for the Feldstein–Horioka puzzle in a 17-country panel. The results show its usefulness for solving complexities in macroeconomic empirical research.

Suggested Citation

  • Mariam Camarero & Juan Sapena & Cecilio Tamarit, 2020. "Modelling Time-Varying Parameters in Panel Data State-Space Frameworks: An Application to the Feldstein–Horioka Puzzle," Computational Economics, Springer;Society for Computational Economics, vol. 56(1), pages 87-114, June.
    • Handle: RePEc:kap:compec:v:56:y:2020:i:1:d:10.1007_s10614-019-09879-x
    DOI: 10.1007/s10614-019-09879-x
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    More about this item

    Keywords

    Feldstein–Horioka puzzle; Panel unit root tests; Multiple structural breaks; Common factors; Kalman Filter; Time varying parameters;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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