Bayesian estimation and model comparison for linear dynamic panel models with missing values

Panel data are collected over several time periods for the same units and hence allow for modelling both latent heterogeneity and dynamics. Since in a dynamic setup, the dependent variable also appears as an explanatory variable in later periods, missing values lead to substantial loss of information and the possibility of inefficient estimation. For linear dynamic panel models with fixed or random effects, we suggest a Bayesian approach to deal with missing values. The Gibbs sampling scheme providing a sample from the posterior distribution is thereby augmented by draws from the full conditional distribution of the missing values. While the full conditional distribution for missing values in the dependent variable is implied by the model setup, we incorporate a flexible non‐parametric approximation to the full conditional posterior distribution of missing values in the explaining variables. Also, we provide accurate non‐nested model comparison in terms of the marginal likelihood from the resulting hybrid Gibbs sampling output. The properties and possible efficiency gains of the suggested approach are illustrated by means of a simulation study and an empirical application using a macroeconomic panel data set.