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A State Space Approach for Estimating VAR Models for Panel Data with Latent Dynamic Components

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    The econometric literature offers various modeling approaches for analyzing micro data in combination with time series of aggregate data. This paper discusses the estimation of a VAR model that allows unobserved heterogeneity across observation unit, as well as unobserved time-specific variables. The time-latent component is assumed to consist of a persistent and a transient term. By using a Helmert-type orthogonal transformation of the variables it is demonstrated that the likelihood function can be expressed on a state space form. The dimension of the state vector is low and independent of the time and cross section dimensions. This fact makes it convenient to employ an ECM algorithm for estimating the parameters of the model. An empirical application provides new insight into the problem of making forecasts for aggregate variables based on information from micro data.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp295.pdf
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    Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 295.

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    Date of creation: Mar 2001
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    Handle: RePEc:ssb:dispap:295
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    1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    2. Nyblom, Jukka & Harvey, Andrew, 1999. "Tests of Common Stochastic Trends," Cambridge Working Papers in Economics 9902, Faculty of Economics, University of Cambridge.
    3. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
    4. Pesaran, M. H., 1999. "On Aggregation of Linear Dynamic Models," Cambridge Working Papers in Economics 9919, Faculty of Economics, University of Cambridge.
    5. repec:cup:cbooks:9780521477451 is not listed on IDEAS
    6. 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.
    7. Cabalero, R.J., 1997. "Aggregaete Investment," Working papers 97-20, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Michael Binder & Cheng Hsiao & M. Hashem Pesaran, 2000. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Banco de Espa�a Working Papers 0005, Banco de Espa�a.
    9. Biorn, Erik, 1981. "Estimating economic relations from incomplete cross-section/time-series data," Journal of Econometrics, Elsevier, vol. 16(2), pages 221-236, June.
    10. Danny Quah & Thomas J. Sargent, 1993. "A Dynamic Index Model for Large Cross Sections," CEP Discussion Papers dp0132, Centre for Economic Performance, LSE.
    11. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Nonstationary Panel Data Analysis: An Overview of Some Recent Developments," Cowles Foundation Discussion Papers 1221, Cowles Foundation for Research in Economics, Yale University.
    12. 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.
    13. repec:cup:cbooks:9780521477444 is not listed on IDEAS
    14. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    15. Clements, Michael P & Hendry, David F, 1996. "Intercept Corrections and Structural Change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(5), pages 475-94, Sept.-Oct.
    16. repec:cup:cbooks:9780521471626 is not listed on IDEAS
    17. Ricardo J. Caballero & Eduardo M. R. A. Engel, 1999. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Econometrica, Econometric Society, vol. 67(4), pages 783-826, July.
    18. repec:cup:cbooks:9780521405515 is not listed on IDEAS
    19. Johansen, Soren, 1995. "The Role of Ancillarity in Inference for Non-stationary Variables," Economic Journal, Royal Economic Society, vol. 105(429), pages 302-20, March.
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