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Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors

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  • Pesaran, Hashem
  • Chudik, Alexander

Abstract

This paper extends the Common Correlated Effects (CCE) approach developed by Pesaran (2006) to heterogeneous panel data models with lagged dependent variable and/or weakly exogenous regressors. We show that the CCE mean group estimator continues to be valid but the following two conditions must be satisfied to deal with the dynamics: a sufficient number of lags of cross section averages must be included in individual equations of the panel, and the number of cross section averages must be at least as large as the number of unobserved common factors. We establish consistency rates, derive the asymptotic distribution, suggest using co- variates to deal with the effects of multiple unobserved common factors, and consider jackknife and recursive de-meaning bias correction procedures to mitigate the small sample time series bias. Theoretical findings are accompanied by extensive Monte Carlo experiments, which show that the proposed estimators perform well so long as the time series dimension of the panel is sufficiently large.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1317.

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Date of creation: 15 May 2013
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Handle: RePEc:cam:camdae:1317

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Large panels; lagged dependent variable; cross sectional dependence; coefficient heterogeneity; estimation and inference; common correlated effects; unobserved common factors.;

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Cited by:
  1. Hyungsik Roger Moon & Martin Weidner, 2013. "Dynamic linear panel regression models with interactive fixed effects," CeMMAP working papers CWP63/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.

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