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On the Estimation of Panel Regression Models with Fixed Effects

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  • Hugo Kruiniger

    (Queen Mary, University of London)

Abstract

This paper considers estimation of panel data models with fixed effects. First, we will show that a consistent ``unrestricted fixed effects'' estimator does not exist for autoregressive panel data models with initial conditions. We will derive necessary and sufficient conditions for the consistency of estimators for these models. In particular, we will show that various widely used GMM estimators for the conditional AR(1) panel model are inconsistent under trending fixed effects sequences. Next, we will derive, justify, and compare restricted Fixed Effects GMM and (Q)ML estimators for this model. We find that the FEML estimator is asymptotically efficient, whereas the Modified ML estimator is not. We will also compare the fixed effects approach for estimating the conditional AR(1) panel model and covariance parameters in static panel data models with the correlated random effects approach.

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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 450.

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Date of creation: Jan 2002
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Handle: RePEc:qmw:qmwecw:wp450

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Keywords: Fixed effects; Correlated effects; (Essentially) random effects; Conditional likelihood; Modified likelihood; GMM; Quasi likelihood; Unit root test; Cross-sectional dependence;

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References

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  1. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  2. Hugo Kruiniger, 2000. "GMM Estimation of Dynamic Panel Data Models with Persistent Data," Working Papers 428, Queen Mary, University of London, School of Economics and Finance.
  3. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  4. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  5. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  6. Newey, Whitney K. & McFadden, Daniel, 1986. "Large sample estimation and hypothesis testing," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 36, pages 2111-2245 Elsevier.
  7. Ahn, Seung C. & Schmidt, Peter, 1997. "Efficient estimation of dynamic panel data models: Alternative assumptions and simplified estimation," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 309-321.
  8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  9. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  10. Sims, Christopher A., 2000. "Using a likelihood perspective to sharpen econometric discourse: Three examples," Journal of Econometrics, Elsevier, vol. 95(2), pages 443-462, April.
  11. Thomas E. MaCurdy, 1981. "Asymptotic Properties of Quasi-Maximum Likelihood Estimators and Test Statistics," NBER Technical Working Papers 0014, National Bureau of Economic Research, Inc.
  12. Thomas E. MaCurdy, 1981. "Multiple Time-Serie3 Models Applied to Panel Data," NBER Working Papers 0646, National Bureau of Economic Research, Inc.
  13. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
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Cited by:
  1. Hugo Kruiniger, 2006. "Quasi ML Estimation of the Panel AR(1) Model with Arbitrary Initial Conditions," Working Papers 582, Queen Mary, University of London, School of Economics and Finance.
  2. Hugo Kruiniger, 2006. "GMM Estimation and Inference in Dynamic Panel Data Models with Persistent Data," Working Papers 560, Queen Mary, University of London, School of Economics and Finance.
  3. Arturas Juodis, 2013. "First Difference Transformation in Panel VAR models: Robustness, Estimation and Inference," UvA-Econometrics Working Papers 13-06, Universiteit van Amsterdam, Dept. of Econometrics.
  4. Gareth M. Thomas & Seung C. Ahn, 2004. "Likelihood Based Inference for amic Panel Data Models," Econometric Society 2004 Far Eastern Meetings 669, Econometric Society.
  5. Steve Bond & CĂ©line Nauges & Frank Windmeijer, 2005. "Unit roots: identification and testing in micro panels," CeMMAP working papers CWP07/05, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Yongfu Huang, 2011. "Private investment and financial development in a globalized world," Empirical Economics, Springer, vol. 41(1), pages 43-56, August.

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