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

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  • Alexander Chudik
  • M. Hashem Pesaran

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 ex-ogenous 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 covariates 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 CESifo Group Munich in its series CESifo Working Paper Series with number 4232.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4232

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

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  1. Pesaran, M. Hashem & Tosetti, Elisa, 2007. "Large Panels with Common Factors and Spatial Correlations," IZA Discussion Papers 3032, Institute for the Study of Labor (IZA).
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  6. Maurice J.G. Bun, 2001. "Bias Correction in the Dynamic Panel Data Model with a Nonscalar Disturbance Covariance Matrix," Tinbergen Institute Discussion Papers 01-007/4, Tinbergen Institute.
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  31. Hyungsik Roger Moon & Martin Weidner, 2013. "Linear regression for panel with unknown number of factors as interactive fixed effects," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP49/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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Citations

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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, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP63/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Liangjun Su & Sainan Jin & Yonghui Zhang, 2014. "Specification Test for Panel Data Models with Interactive Fixed Effects," Working Papers, Singapore Management University, School of Economics 08-2014, Singapore Management University, School of Economics.
  3. Ruge-Leiva, Diego-Ivan, 2014. "International R&D Spillovers and Unobserved Common Shocks," MPRA Paper 56718, University Library of Munich, Germany.

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