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Testing for Persistence in the Error Component Model:A One-Sided Approach

  • Walter Sosa Escudero

    ()

    (Department of Economics, Universidad de San Andres)

This paper proposes new simple testing procedures for the joint null hypothesis of absence of persistent e®ects in the form of random e®ects and ¯rst order serial correlation in the error component model. The fact that the presence of random effects is clearly of a one-sided nature, together with the fact that in many empirical applications researchers worry about positive serial correlation leaves room for a power gain that arises from restricting the parameter space under the alternative hypothesis, compared to existing procedures that allow for two-sided alternatives. A Monte Carlo experiment shows that the proposed statistics have good size and power performance in very small samples like those typically used in applied work in panel data. An empirical example illustrates the usefulness of the proposed statistics.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc94.pdf
File Function: First version, 2007
Download Restriction: no

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 94.

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Length: 22 pages
Date of creation: Feb 2007
Date of revision: Feb 2007
Handle: RePEc:sad:wpaper:94
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  1. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  2. Baltagi, Badi H. & Li, Qi, 1991. "A joint test for serial correlation and random individual effects," Statistics & Probability Letters, Elsevier, vol. 11(3), pages 277-280, March.
  3. Anil Bera & Walter Sosa Escudero & Mann Yoon, 2000. "Test for the Error Component Model in the Presence of Local Misspecification," Department of Economics, Working Papers 022, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.
  4. Baltagi, Badi H. & Chang, Young-Jae & Li, Qi, 1992. "Monte Carlo results on several new and existing tests for the error component model," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 95-120.
  5. repec:cup:cbooks:9780521477444 is not listed on IDEAS
  6. Inoue, Atsushi & Solon, Gary, 2006. "A Portmanteau Test For Serially Correlated Errors In Fixed Effects Models," Econometric Theory, Cambridge University Press, vol. 22(05), pages 835-851, October.
  7. Hendry, David F & Mizon, Grayham E, 1978. "Serial Correlation as a Convenient Simplification, not a Nuisance: A Comment on a Study of the Demand for Money by the Bank of England," Economic Journal, Royal Economic Society, vol. 88(351), pages 549-63, September.
  8. repec:cup:cbooks:9780521471626 is not listed on IDEAS
  9. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 239-53, January.
  10. Samuel Freije & Andre Potela Souza, 2002. "Earnings Dynamics and Inequality in Venezuela: 1995-1997," Vanderbilt University Department of Economics Working Papers 0211, Vanderbilt University Department of Economics.
  11. repec:cup:cbooks:9780521477451 is not listed on IDEAS
  12. repec:cup:cbooks:9780521405515 is not listed on IDEAS
  13. Honda, Yuzo, 1985. "Testing the Error Components Model with Non-normal Disturbances," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 681-90, October.
  14. Walter Sosa-Escudero & Mariana Marchionni & Omar Arias, 2006. "Sources of Income Persistence: Evidence from Rural El Salvador," CEDLAS, Working Papers 0037, CEDLAS, Universidad Nacional de La Plata.
  15. Maxwell King & Ping Wu, 1997. "Locally optimal one-sided tests for multiparameter hypotheses," Econometric Reviews, Taylor & Francis Journals, vol. 16(2), pages 131-156.
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