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Indirect Inference for Dynamic Panel Models

  • Christian Gouriéroux

    (SMU)

  • Peter C. B. Phillips
  • Jun Yu

It is well-known that maximum likelihood (ML) estimation of the autoregressive parameter of a dynamic panel data model with .xed eects is inconsistent under .xed time series sample size (T) and large cross section sample size (N) asymptotics. The estimation bias is particularly relevant in practical applications when T is small and the autoregressive parameter is close to unity. The present paper proposes a general, computationally inexpensive method of bias reduction that is based on indirect inference (Gouriroux et al., 1993), shows unbiasedness and analyzes efficiency. The method is implemented in a simple linear dynamic panel model, but has wider applicability and can, for instance, be easily ex-tended to more complicated frameworks such as nonlinear models. Monte Carlo studies show that the proposed procedure achieves substantial bias reductions with only mild increases in variance, thereby substantially reducing root mean square errors. The method is compared with certain consistent estimators and bias-corrected ML estimators previously proposed in the literature and is shown to have superior .nite sample properties to GMM and the bias-corrected ML of Hahn and Kuersteiner (2002). Finite sample performance is compared with that of a recent estimator proposed by Han and Phillips (2005).

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File URL: http://www.eaber.org/node/22421
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Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22421.

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Date of creation: Jan 2006
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Handle: RePEc:eab:develo:22421
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Alvarez, J. & Arellano, M., 1998. "The Time Series and Cross-Section Asymptotics of Dynamic Panel Data Estimators," Papers 9808, Centro de Estudios Monetarios Y Financieros-.
  2. Jinyong Hahn & Whitney Newey, 2004. "Jackknife and Analytical Bias Reduction for Nonlinear Panel Models," Econometrica, Econometric Society, vol. 72(4), pages 1295-1319, 07.
  3. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
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  7. Hahn, Jinyong, 1997. "Efficient estimation of panel data models with sequential moment restrictions," Journal of Econometrics, Elsevier, vol. 79(1), pages 1-21, July.
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  12. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
  13. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  14. Peter C. B. Phillips & Jun Yu, 2008. "Simulation-based Estimation of Contingent-claims Prices," Finance Working Papers 22473, East Asian Bureau of Economic Research.
  15. Peter C.B. Phillips & Donggyu Sul, 2003. "Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence," Cowles Foundation Discussion Papers 1438, Cowles Foundation for Research in Economics, Yale University, revised Jun 2004.
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  19. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
  20. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
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  25. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  26. Jinyong Hahn & Guido Kuersteiner, 2002. "Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects when Both "n" and "T" Are Large," Econometrica, Econometric Society, vol. 70(4), pages 1639-1657, July.
  27. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
  28. Tripathi, Gautam, 2000. "Econometric Methods," Econometric Theory, Cambridge University Press, vol. 16(01), pages 139-142, February.
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