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Nickell bias in panel local projection: Financial crises are worse than you think

Author

Listed:
  • Mei, Ziwei
  • Sheng, Liugang
  • Shi, Zhentao

Abstract

Panel local projection (LP) with fixed-effects (FE) is widely adopted for evaluating the economic consequences of financial crises across countries. This paper highlights a fundamental methodological issue: the presence of the Nickell bias in the panel FE estimator due to inherent dynamic structures of predictive specifications, even if the regressors have no lagged dependent variables. The Nickell bias invalidates the standard inferential procedure based on the t-statistic. We propose a split-panel jackknife (SPJ) estimator as a simple, easy-to-implement, and yet effective solution to eliminate the bias and restore valid statistical inference. We revisit four influential empirical studies on the impact of financial crises, and find that the FE method underestimates the economic losses of financial crises relative to the SPJ estimates. Replication files are available at https://metricshilab.github.io/panel-lp-replication/, with links to R and Stata packages.

Suggested Citation

  • Mei, Ziwei & Sheng, Liugang & Shi, Zhentao, 2026. "Nickell bias in panel local projection: Financial crises are worse than you think," Journal of International Economics, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:inecon:v:160:y:2026:i:c:s0022199625001679
    DOI: 10.1016/j.jinteco.2025.104210
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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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