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On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications

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  • Alessandro Rebucci

Abstract

This paper studies asymptotically the bias of the fixed effect (FE) estimator induced by cross-section heterogeneity in the slope parameters of stationary vector autoregressions (VARs). The paper also compares the FE, the mean group estimator (MG), and a simple instrumental variable alternative (IV) in Monte Carlo simulations. The main results are: (i) asymptotically, the heterogeneity bias of the FE may be more or less severe in VAR specifications than in standard dynamic panel data specifications; (ii) in Monte Carlo simulations, slope heterogeneity must be relatively high to be a source of concern for pooled estimators; (iii) when this happens, the panel must be longer than a typical macro dataset for the MG to be a viable solution.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/73.

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Length: 45
Date of creation: 01 Apr 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/73

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Related research

Keywords: Economic models; Exchange risk; time series; finite sample; sample bias; econometrics; equation; correlation; covariance; standard errors; dynamic panel; dynamic panel data; monte carlo simulations; standard deviations; regression equation; parameter value; monte carlo simulation; forecasting; samples; cointegration; equations; mean group; dynamic panel data models; statistics; mean group estimator; granger causality; correlations; individual time series; autocorrelation; normal distribution; instrumental variable; linear regression; random coefficient; data analysis; constant variance; degree of heterogeneity; aggregate time series; regression model; simultaneous equation; dynamic models; simultaneous equations; econometrics of panel data; dynamic heterogeneous panels; estimation procedure; random variable; causation; standard error; arithmetic; fixed effects estimator; law of large numbers; linear models; prediction; factor analysis; econometric issues; instrumental variables; simulation results; polynomials; dynamic linear models; probability; mean square; number of parameters; number of variables;

References

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  1. Robertson, D & Symons, J, 1992. "Some Strange Properties of Panel Data Estimators," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 7(2), pages 175-89, April-Jun.
  2. Karim M. Abadir & Kaddour Hadri & Elias Tzavalis, 1999. "The Influence of VAR Dimensions on Estimator Biases," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 163-182, January.
  3. Binder, M. & Hsaio, C. & Pesaran, M.H., 2000. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0003, Faculty of Economics, University of Cambridge.
  4. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 53-78, July.
  5. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9215, Faculty of Economics, University of Cambridge.
  6. Carroll, Christopher D. & Weil, David N., 1994. "Saving and growth: a reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 40(1), pages 133-192, June.
  7. Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000. "The generalised dynamic factor model: identification and estimation," ULB Institutional Repository 2013/10143, ULB -- Universite Libre de Bruxelles.
  8. Thomas Doan & Robert B. Litterman & Christopher A. Sims, 1986. "Forecasting and conditional projection using realistic prior distribution," Staff Report, Federal Reserve Bank of Minneapolis 93, Federal Reserve Bank of Minneapolis.
  9. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, Econometric Society, vol. 56(6), pages 1371-95, November.
  10. Hsiao, C. & Pesaran, M. H. & Tahmiscioglu, A. K., 1998. "Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9804, Faculty of Economics, University of Cambridge.
  11. Larsson, Rolf & Lyhagen, Johan, 1999. "Likelihood-Based Inference in Multivariate Panel Cointegration Models," Working Paper Series in Economics and Finance 331, Stockholm School of Economics.
  12. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, Elsevier, vol. 65(1), pages 9-15, October.
  13. Cornwell, Christopher & Schmidt, Peter & Wyhowski, Donald, 1992. "Simultaneous equations and panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 51(1-2), pages 151-181.
  14. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  15. Banerjee, Anindya, 1999. " Panel Data Unit Roots and Cointegration: An Overview," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 61(0), pages 607-29, Special I.
  16. Hendry, David F., 1984. "Monte carlo experimentation in econometrics," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 16, pages 937-976 Elsevier.
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Citations

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Cited by:
  1. Towbin, Pascal & Weber, Sebastian, 2013. "Limits of floating exchange rates: The role of foreign currency debt and import structure," Journal of Development Economics, Elsevier, Elsevier, vol. 101(C), pages 179-194.
  2. Aiyar, Shekhar & Calomiris , Charles W & Wieladek, Tomasz, 2012. "Does macropru leak? Evidence from a UK policy experiment," Bank of England working papers, Bank of England 445, Bank of England.
  3. Peter Tillmann, 2012. "Capital Inflows and Asset Prices: Evidence from Emerging Asia," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201215, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  4. Robert Gillanders, 2011. "The Effects of Foreign Aid in Sub-Saharan Africa," Working Papers, School Of Economics, University College Dublin 201116, School Of Economics, University College Dublin.
  5. Tomasz Wieladek & Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 12/98, International Monetary Fund.

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