IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2507.19099.html

Interactive, Grouped and Non-separable Fixed Effects: A Practitioner's Guide to the New Panel Data Econometrics

Author

Listed:
  • Jan Ditzen
  • Yiannis Karavias

Abstract

The past 20 years have brought fundamental advances in modeling unobserved heterogeneity in panel data. Interactive Fixed Effects (IFE) proved to be a foundational framework, generalizing the standard one-way and two-way fixed effects models by allowing the unit-specific unobserved heterogeneity to be interacted with unobserved time-varying common factors, allowing for more general forms of omitted variables. The IFE framework laid the theoretical foundations for other forms of heterogeneity, such as grouped fixed effects (GFE) and non-separable two-way fixed effects (NSTW). The existence of IFE, GFE or NSTW has significant implications for identification, estimation, and inference, leading to the development of many new estimators for panel data models. This paper provides an accessible review of the new estimation methods and their associated diagnostic tests, and offers a guide to empirical practice. In two separate empirical investigations we demonstrate that there is empirical support for the new forms of fixed effects and that the results can differ significantly from those obtained using traditional fixed effects estimators.

Suggested Citation

  • Jan Ditzen & Yiannis Karavias, 2025. "Interactive, Grouped and Non-separable Fixed Effects: A Practitioner's Guide to the New Panel Data Econometrics," Papers 2507.19099, arXiv.org, revised Oct 2025.
    • Handle: RePEc:arx:papers:2507.19099
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2507.19099
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hong, Shengjie & Su, Liangjun & Jiang, Tao, 2023. "Profile GMM estimation of panel data models with interactive fixed effects," Journal of Econometrics, Elsevier, vol. 235(2), pages 927-948.
    2. Karabiyik, Hande & Reese, Simon & Westerlund, Joakim, 2017. "On the role of the rank condition in CCE estimation of factor-augmented panel regressions," Journal of Econometrics, Elsevier, vol. 197(1), pages 60-64.
    3. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    4. Guowei Cui & Milda NorkutÄ— & Vasilis Sarafidis & Takashi Yamagata, 2022. "Two-stage instrumental variable estimation of linear panel data models with interactive effects [Eigenvalue ratio test for the number of factors]," The Econometrics Journal, Royal Economic Society, vol. 25(2), pages 340-361.
    5. Perron, P, 1993. "Erratum [The Great Crash, the Oil Price Shock and the Unit Root Hypothesis]," Econometrica, Econometric Society, vol. 61(1), pages 248-249, January.
    6. Ahn, Seung Chan & Hoon Lee, Young & Schmidt, Peter, 2001. "GMM estimation of linear panel data models with time-varying individual effects," Journal of Econometrics, Elsevier, vol. 101(2), pages 219-255, April.
    7. Artūras Juodis & Vasilis Sarafidis, 2022. "A Linear Estimator for Factor-Augmented Fixed-T Panels With Endogenous Regressors," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 40(1), pages 1-15, January.
    8. Pesaran, M. H. & Smith, R. P., 2023. "The Role of Pricing Errors in Linear Asset Pricing Models with Strong, Semi-strong, and Latent Factors," Cambridge Working Papers in Economics 2317, Faculty of Economics, University of Cambridge.
    9. Anatolyev, Stanislav & Mikusheva, Anna, 2022. "Factor models with many assets: Strong factors, weak factors, and the two-pass procedure," Journal of Econometrics, Elsevier, vol. 229(1), pages 103-126.
    10. Sebastian Kripfganz & Vasilis Sarafidis, 2021. "Instrumental-variable estimation of large-T panel-data models with common factors," Stata Journal, StataCorp LLC, vol. 21(3), pages 659-686, September.
    11. Tore Bersvendsen & Jan Ditzen, 2021. "Testing for slope heterogeneity in Stata," Stata Journal, StataCorp LLC, vol. 21(1), pages 51-80, March.
    12. Arturas Juodis & Simon Reese, 2018. "The Incidental Parameters Problem in Testing for Remaining Cross-section Correlation," Papers 1810.03715, arXiv.org, revised Feb 2021.
    13. Degui Li & Junhui Qian & Liangjun Su, 2016. "Panel Data Models With Interactive Fixed Effects and Multiple Structural Breaks," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 111(516), pages 1804-1819, October.
    14. Jan Ditzen, 2018. "Estimating dynamic common-correlated effects in Stata," Stata Journal, StataCorp LLC, vol. 18(3), pages 585-617, September.
    15. Artūras Juodis, 2022. "A regularization approach to common correlated effects estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 788-810, June.
    16. Castagnetti, Carolina & Rossi, Eduardo & Trapani, Lorenzo, 2019. "A two-stage estimator for heterogeneous panel models with common factors," Econometrics and Statistics, Elsevier, vol. 11(C), pages 63-82.
    17. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters, in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412, National Bureau of Economic Research, Inc.
    18. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 132-132.
    19. Iván Fernández‐Val & Joonhwah Lee, 2013. "Panel data models with nonadditive unobserved heterogeneity: Estimation and inference," Quantitative Economics, Econometric Society, vol. 4(3), pages 453-481, November.
    20. Ignace De Vos & Gerdie Everaert & Vasilis Sarafidis, 2024. "A method to evaluate the rank condition for CCE estimators," Econometric Reviews, Taylor & Francis Journals, vol. 43(2-4), pages 123-155, April.
    21. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    22. Stock, James H & Watson, Mark W, 1996. "Evidence on Structural Instability in Macroeconomic Time Series Relations," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 11-30, January.
    23. Marco Barassi & Yiannis Karavias & Chongxian Zhu, 2023. "Threshold Regression in Heterogeneous Panel Data with Interactive Fixed Effects," Papers 2308.04057, arXiv.org, revised Jan 2026.
    24. Hause, John C, 1980. "The Fine Structure of Earnings and the On-the-Job Training Hypothesis," Econometrica, Econometric Society, vol. 48(4), pages 1013-1029, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Le Clech, Néstor A., 2024. "Policy market orientation, property rights, and corruption effects on the rent of non-renewable resources in Latin America and the Caribbean," Resources Policy, Elsevier, vol. 91(C).
    2. Eibinger, Tobias & Deixelberger, Beate & Manner, Hans, 2024. "Panel data in environmental economics: Econometric issues and applications to IPAT models," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    3. Sebastian Kripfganz & Vasilis Sarafidis, 2021. "Instrumental-variable estimation of large-T panel-data models with common factors," Stata Journal, StataCorp LLC, vol. 21(3), pages 659-686, September.
    4. De Vos, Ignace & Stauskas, Ovidijus, 2024. "Cross-section bootstrap for CCE regressions," Journal of Econometrics, Elsevier, vol. 240(1).
    5. Jan Ditzen & Ovidijus Stauskas, 2025. "On Selection of Cross-Section Averages in Non-stationary Environments," Papers 2505.08615, arXiv.org, revised Oct 2025.
    6. Mariam Camarero & Alejandro Muñoz & Cecilio Tamarit, 2022. "The rise and fall of global financial flows in EU 15: new evidence using dynamic panels with common correlated effects," Working Papers 2212, Department of Applied Economics II, Universidad de Valencia.
    7. Hong, Shengjie & Su, Liangjun & Jiang, Tao, 2023. "Profile GMM estimation of panel data models with interactive fixed effects," Journal of Econometrics, Elsevier, vol. 235(2), pages 927-948.
    8. Chen, Jia & Cui, Guowei & Sarafidis, Vasilis & Yamagata, Takashi, 2025. "IV Estimation of Heterogeneous Spatial Dynamic Panel Models with Interactive Effects," MPRA Paper 123497, University Library of Munich, Germany.
    9. Brian Tavonga Mazorodze, 2025. "Renewable Energy Consumption and Green Growth in Sub-Saharan Africa," Energies, MDPI, vol. 18(7), pages 1-25, April.
    10. Boundi-Chraki, Fahd & Perrotini-Hernández, Ignacio, 2025. "Re-examining the automation-employment nexus from a classical political economy approach," Structural Change and Economic Dynamics, Elsevier, vol. 75(C), pages 32-51.
    11. Jan Ditzen & Yiannis Karavias & Joakim Westerlund, 2022. "Multiple Structural Breaks in Interactive Effects Panel Data and the Impact of Quantitative Easing on Bank Lending," Papers 2211.06707, arXiv.org, revised Jan 2023.
    12. Zhenhao Gong & Min Seong Kim, 2024. "Improved Inference for Interactive Fixed Effects Model under Cross-Sectional Dependence," Working papers 2024-02, University of Connecticut, Department of Economics.
    13. Artūras Juodis, 2022. "A regularization approach to common correlated effects estimation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(4), pages 788-810, June.
    14. Guowei Cui & Milda NorkutÄ— & Vasilis Sarafidis & Takashi Yamagata, 2022. "Two-stage instrumental variable estimation of linear panel data models with interactive effects [Eigenvalue ratio test for the number of factors]," The Econometrics Journal, Royal Economic Society, vol. 25(2), pages 340-361.
    15. Ovidijus Stauskas & Ignace De Vos, 2025. "Handling Distinct Correlated Effects with CCE," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 87(2), pages 448-475, April.
    16. Mariam Camarero & Sergi Moliner & Cecilio Tamarit, 2025. "Which are the long-run determinants of US outward FDI? Evidence using large long-memory panels," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 34(2), pages 259-290, February.
    17. David Dosso, 2025. "Which Countries are “Particularly Vulnerable†to Climate Change? A New Climate Vulnerability Indicator," Working Papers 2025.2, International Network for Economic Research - INFER.
    18. Juliana D. Araujo & Povilas Lastauskas & Chris Papageorgiou, 2017. "Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1517-1554, October.
    19. Linus Nyiwul & Zhining Hu & Niraj P. Koirala & Hannah Wasson, 2025. "Economic uncertainty and renewable energy investment," International Economics and Economic Policy, Springer, vol. 22(3), pages 1-36, July.
    20. repec:cam:camjip:2429 is not listed on IDEAS
    21. Hwang, Young Kyu & Sánchez Díez, Ángeles, 2024. "Renewable energy transition and green growth nexus in Latin America," Renewable and Sustainable Energy Reviews, Elsevier, vol. 198(C).

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2507.19099. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.