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Asymptotic Properties of Estimators for the Linear Panel Regression Model with Individual Effects and Serially Correlated Errors: The Case of Stationary and Non-Stationary Regressors and Residuals

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Author Info
Badi H. Baltagi () (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)
Chihwa Kao () (Center for Policy Research, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)
Long Liu () (Department of Economics, Maxwell School, Syracuse University, Syracuse, NY 13244-1020)

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Abstract

This paper studies the asymptotic properties of standard panel data estimators in a simple panel regression model with error component disturbances. Both the regressor and the remainder disturbance term are assumed to be autoregressive and possibly non-stationary. Asymptotic distributions are derived for the standard panel data estimators including ordinary least squares, fixed effects, first-difference, and generalized least squares (GLS) estimators when both T and n are large. We show that all the estimators have asymptotic normal distributions and have different convergence rates dependent on the non-stationarity of the regressors and the remainder disturbances. We show using Monte Carlo experiments that the loss in efficiency of the OLS, FE and FD estimators relative to true GLS can be substantial.

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Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 93.

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Length: 76 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:max:cprwps:93

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Related research
Keywords: Panel data; OLS; Fixed-effects; First-difference; GLS.;

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Find related papers by JEL classification:
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Joerg Breitung & M. Hashem Pesaran, 2005. "Unit Roots and Cointegration in Panels," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Badi H. Baltagi & Qi Li, 1997. "Monte Carlo Results on Pure and Pretest Estimators of an Error Component Model with Autocorrelated Disturbances," Annales d'Economie et de Statistique, ADRES, issue 48, pages 04, Octobre-D. [Downloadable!]
  3. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December. [Downloadable!] (restricted)
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  4. Beach, Charles M & MacKinnon, James G, 1978. "A Maximum Likelihood Procedure for Regression with Autocorrelated Errors," Econometrica, Econometric Society, vol. 46(1), pages 51-58, January. [Downloadable!] (restricted)
  5. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation, Yale University. [Downloadable!]
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  6. Sentana, Enrique, 1997. "Estimation of a Triangular, Seemingly Unrelated, Regression System by OLS," Econometric Theory, Cambridge University Press, vol. 13(03), pages 463-463, June. [Downloadable!]
  7. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May. [Downloadable!] (restricted)
  8. Baltagi, Badi H. & Li, Qi, 1991. "A transformation that will circumvent the problem of autocorrelation in an error-component model," Journal of Econometrics, Elsevier, vol. 48(3), pages 385-393, June. [Downloadable!] (restricted)
  9. Park, Rolla Edward & Mitchell, Bridger M., 1980. "Estimating the autocorrelated error model with trended data," Journal of Econometrics, Elsevier, vol. 13(2), pages 185-201, June. [Downloadable!] (restricted)
  10. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  11. Masao Ogaki & Ling Hu & Chi-Young Choi, 2004. "A Spurious Regression Approach to Estimating Structural Parameters," Working Papers 04-01, Ohio State University, Department of Economics. [Downloadable!]
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  12. Choi, In, 2002. "Instrumental variables estimation of a nearly nonstationary, heterogeneous error component model," Journal of Econometrics, Elsevier, vol. 109(1), pages 1-32, July. [Downloadable!] (restricted)
  13. Baltagi, Badi H. & Boozer, Michael A., 1997. "Econometric Analysis of Panel Data," Econometric Theory, Cambridge University Press, vol. 13(05), pages 747-754, October. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yin-Wong Cheung & XingWang Qian, 2009. "The Empirics of China's Outward Direct Investment," Working Papers 172009, Hong Kong Institute for Monetary Research. [Downloadable!]
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