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Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence

This paper deals with cross section dependence, homogeneity restrictions and small sample bias issues in dynamic panel regressions. To address the bias problem we develop a panel approach to median unbiased estimation that takes account of cross section dependence. The new estimators given here considerably reduce the effects of bias and gain precision from estimating cross section error correlation. The paper also develops an asymptotic theory for tests of coefficient homogeneity under cross section dependence, and proposes a modified Hausman test to test for the presence of homogeneous unit roots. An orthogonalization procedure is developed to remove cross section dependence and permit the use of conventional and meta unit root tests with panel data. Some simulations investigating the finite sample performance of the estimation and test procedures are reported.

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File URL: http://cowles.econ.yale.edu/P/cd/d13b/d1362.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1362.

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Length: 56 pages
Date of creation: May 2002
Date of revision:
Publication status: Published in Econometrics Journal (June 2003), 6(1): 217-259
Handle: RePEc:cwl:cwldpp:1362
Note: CFP 1136
Contact details of provider: Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  2. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  4. Christian J. Murray & David H. Papell, 2000. "The Purchasing Power Parity Persistence Paradigm," Econometric Society World Congress 2000 Contributed Papers 0017, Econometric Society.
  5. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  6. Jinyong Hahn & Jerry Hausman & Guido Kuersteiner, 2005. "Bias Corrected Instrumental Variables Estimation for Dynamic Panel Models with Fixed E¤ects," Boston University - Department of Economics - Working Papers Series WP2005-024, Boston University - Department of Economics.
  7. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  8. Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
  9. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  11. Donald W.K. Andrews, 1991. "Exactly Unbiased Estimation of First Order Autoregressive-Unit Root Models," Cowles Foundation Discussion Papers 975, Cowles Foundation for Research in Economics, Yale University.
  12. Evans, Paul & Karras, Georgios, 1996. "Convergence revisited," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 249-265, April.
  13. Andrews, Donald W K & Chen, Hong-Yuan, 1994. "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 187-204, April.
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