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A bias-corrected fixed effects estimator for the dynamic panel data model with exogenous variables

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  • Kao, Chihwa
  • Liu, Long
  • Sun, Rui

Abstract

In this paper, we propose a bias-corrected fixed-effects estimator for the dynamic panel data model with large n and T. It is easy to implement comparing to alternative approaches. We also extend this estimator to accommodate the unit-root case. Monte Carlo simulations show that our estimator yields results similar to the iterative bias-corrected estimator in Bun and Carree (2005) across many simulation setups, but with faster computational speed. An empirical application is also provided to demonstrate the practical benefits of our approach.

Suggested Citation

  • Kao, Chihwa & Liu, Long & Sun, Rui, 2025. "A bias-corrected fixed effects estimator for the dynamic panel data model with exogenous variables," Economics Letters, Elsevier, vol. 254(C).
    • Handle: RePEc:eee:ecolet:v:254:y:2025:i:c:s0165176525002630
    DOI: 10.1016/j.econlet.2025.112426
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    References listed on IDEAS

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    1. Bun, Maurice J.G. & Carree, Martin A., 2005. "Bias-Corrected Estimation in Dynamic Panel Data Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 200-210, April.
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    4. Jinyong Hahn & Guido Kuersteiner, 2002. "Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects when Both "n" and "T" Are Large," Econometrica, Econometric Society, vol. 70(4), pages 1639-1657, July.
    5. Bun, Maurice J.G. & Carree, Martin A., 2006. "Bias-corrected estimation in dynamic panel data models with heteroscedasticity," Economics Letters, Elsevier, vol. 92(2), pages 220-227, August.
    6. Han, Chirok & Phillips, Peter C. B. & Sul, Donggyu, 2014. "X-Differencing And Dynamic Panel Model Estimation," Econometric Theory, Cambridge University Press, vol. 30(1), pages 201-251, February.
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    8. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    9. Chihwa Kao & Long Liu & Rui Sun, 2021. "A bias-corrected fixed effects estimator in the dynamic panel data model," Empirical Economics, Springer, vol. 60(1), pages 205-225, January.
    10. Kruiniger, Hugo, 2018. "A further look at Modified ML estimation of the panel AR(1) model with fixed effects and arbitrary initial conditions," MPRA Paper 110375, University Library of Munich, Germany, revised 15 Aug 2021.
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    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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