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Small sample properties of panel time-series estimators with I(1) errors

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  • Jerry Coakley, Ana-Maria Fuertes, Ron Smith

Abstract

Monte Carlo simulations are used to explore the small-sample properties of a mean group and two pooled panel estimators of a regression coefficient when the regressor is I(1). We compare and contrast the effect of I(0) and I(1) errors and homogeneous and heterogeneous coefficients in a design based on two typical PPP panels. The results confirm that the asymptotic theory is relevant to practical applications. With I(0) errors and homogeneous coefficients, the estimators are unbiased, dispersion depends on the signal-noise ratio and falls at rate T(rootN) as expected. With I(1) errors and no cointegration, dispersion falls at rate rootN. When heterogeneity is introduced with I(0) errors, the dispersion of the pooled estimators falls at rate root N, but that of the mean group continues to fall at rate T(rootN). Finally, the pooled estimators are likely to lead to distorted inference both in the case of I(1) errors and the case of I(0) errors with heterogeneous coefficients case. The mean group estimators are, however, are generally correctly sized.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 191.

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Date of creation: 01 Apr 2001
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Handle: RePEc:sce:scecf1:191

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Keywords: Monte Carlo; response surface; spurious regression; PPP;

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Cited by:
  1. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 B5-3, International Conferences on Panel Data.
  2. Herwartz, Helmut & Xu, Fang, 2006. "Panel data model comparison for empirical saving-investment relations," Economics Working Papers 2006,06, Christian-Albrechts-University of Kiel, Department of Economics.
  3. Jerry Coakley & Ana-Maria Fuertes & Fabio Spagnolo, 2004. "The Feldstein-Horioka puzzle is not as bad as you think," Money Macro and Finance (MMF) Research Group Conference 2003 17, Money Macro and Finance Research Group.
  4. Jerry Coakley & Stuart Snaith, 2005. "Testing for symmetry and proportionality in a European panel," Applied Financial Economics, Taylor & Francis Journals, vol. 15(11), pages 745-752.
  5. Jerry Coakley & Stuart Snaith, 2004. "Testing for Long Run Relative PPP in Europe," Money Macro and Finance (MMF) Research Group Conference 2004 34, Money Macro and Finance Research Group.
  6. Markus Eberhardt & Francis Teal, 2010. "Productivity Analysis in Global Manufacturing Production," DEGIT Conference Papers c015_019, DEGIT, Dynamics, Economic Growth, and International Trade.
  7. Saten Kumar & B. Bhaskara Rao, 2011. "A Time‐series Approach to the Feldstein–Horioka Puzzle with Panel Data from the OECD Countries," The World Economy, Wiley Blackwell, vol. 34(3), pages 473-485, 03.
  8. Fabiana Rocha, 2009. "Heterogeneity, saving-investment dynamics and capital mobility in Latin America," Empirical Economics, Springer, vol. 36(3), pages 611-619, June.
  9. Hartmann, Matthias & Roestel, Jan, 2013. "Inflation, output and uncertainty in the era of inflation targeting – A multi-economy view on causal linkages," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 98-112.
  10. Eberhardt, Markus & Teal, Francis, 2008. "Modeling technology and technological change in manufacturing: how do countries differ?," MPRA Paper 10690, University Library of Munich, Germany.
  11. Österholm, Pär, 2004. "Estimating the Relationship between Age Structure and GDP in the OECD Using Panel Cointegration Methods," Working Paper Series 2004:13, Uppsala University, Department of Economics.
  12. Jerry Coakley & Ana-Maria Fuertes & Andrew Wood, 2004. "A new interpretation of the exchange rate-yield differential nexus," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(3), pages 201-218.
  13. Noman, Abdullah, 2008. "Testing for PPP in the Mean-Group Panel Regression Framework: Further Evidence," MPRA Paper 7825, University Library of Munich, Germany.
  14. Rocha, Fabiana, 2005. "Heterogeneity, cross section dependence and capital mobility in developing countries," Economics Letters, Elsevier, vol. 89(1), pages 18-23, October.
  15. Joseph F. Francois & Julia Wörz, 2011. "Shifts in International Trade and Value Added from 1995 to 2007: Insights into the Drivers of Growth," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.
  16. James Smith, 2008. "That elusive elasticity and the ubiquitous bias: is panel data a panacea?," Bank of England working papers 342, Bank of England.
  17. repec:ebl:ecbull:v:6:y:2008:i:20:p:1-12 is not listed on IDEAS

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