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Likelihood approach to dynamic panel models with interactive effects

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  • Bai, Jushan

Abstract

This paper studies dynamic panel models with a factor error structure that is correlated with the regressors. Both short panels (small T) and long panels (large T) are considered. A dynamic panel forms a simultaneous-equation system, and under the factor error structure, there exist constraints between the mean and the covariance matrix. We explore the constraints through a quasi-FIML (full information maximum likelihood) approach. The quasi-FIML approach does not estimate individual effects, even if they are fixed constants, thus circumventing the incidental parameters problem in the cross-sectional dimension.

Suggested Citation

  • Bai, Jushan, 2024. "Likelihood approach to dynamic panel models with interactive effects," Journal of Econometrics, Elsevier, vol. 240(1).
    • Handle: RePEc:eee:econom:v:240:y:2024:i:1:s0304407623003524
    DOI: 10.1016/j.jeconom.2023.105636
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