Approximation formulae are developed for the bias of ordinary and generalized Least Squares Dummy Variable (LSDV) estimators in dynamic panel data models. Results from Kiviet (1995, 1999) are extended to higher-order dynamic panel data models with general covariance structure. The focus is on estimation of both short- and long-run coefficients. The results show that proper modelling of the disturbance covariance structure is indispensable. The bias approximations are used to construct bias corrected estimators which are then applied to quarterly data from 14 European Union countries. Money demand functions for M1, M2 and M3 are estimated for the EU area as a whole for the period 1991:I-1995:IV. Significant spillovers between countries are found reflecting the dependence of domestic money demand on foreign developments. The empirical results show that in general plausible long-run effects are obtained by the bias corrected estimators. Moreover, bias correction can be substantial underlining the importance of more refined estimation techniques. Also the efficiency gains by exploiting the heteroscedasticity and cross-correlation patterns between countries are sometimes considerable.
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