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Long-Run Effects in Large Heterogeneous Panel Data Models with Cross-Sectionally Correlated Errors

In: Essays in Honor of man Ullah

Author

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  • Alexander Chudik
  • Kamiar Mohaddes
  • M. Hashem Pesaran
  • Mehdi Raissi

Abstract

This paper develops a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in large dynamic heterogeneous panel data models with cross-sectionally dependent errors. The asymptotic distribution of the CS-DL estimator is derived under coefficient heterogeneity in the case where the time dimension (T) and the cross-section dimension (N) are both large. The CS-DL approach is compared with more standard panel data estimators that are based on autoregressive distributed lag (ARDL) specifications. It is shown that unlike the ARDL-type estimator, the CS-DL estimator is robust to misspecification of dynamics and error serial correlation. The theoretical results are illustrated with small sample evidence obtained by means of Monte Carlo simulations, which suggest that the performance of the CS-DL approach is often superior to the alternative panel ARDL estimates, particularly whenTis not too large and lies in the range of 30–50.

Suggested Citation

  • Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran & Mehdi Raissi, 2016. "Long-Run Effects in Large Heterogeneous Panel Data Models with Cross-Sectionally Correlated Errors," Advances in Econometrics, in: Essays in Honor of man Ullah, volume 36, pages 85-135, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320160000036013
    DOI: 10.1108/S0731-905320160000036013
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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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