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A Dynamic “Fixed Effects” Model for Heterogeneous Panel Data

  • Diana Weinhold

    (London School of Economics)

This paper introduces a dynamic panel data model in which the intercepts and the coefficients on the lagged endogenous variables are specific to the cross section units, while the coefficients on the exogenous variables are assumed to be normally distributed across the cross section. Thus the model includes mixture of fixed coefficients and random coefficients, which I call the “MFR” model. The paper shows that this model has several desirable characteristics. In particular, the model allows for a considerable degree of heterogeneity across the cross section both in the dynamics and in the relationship between the independent and dependent variables. Estimation of the MFR model produces an estimate of the variance of the coefficients across the cross section units which can be used as a diagnostic tool to judge how widespread a relationship is and whether pooling of the data is appropriate. In addition, unlike LSDV estimation of dynamic panel models, the MFR model does not produce severely biased estimates when T is small.

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Paper provided by EconWPA in its series Econometrics with number 0410003.

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Length: 18 pages
Date of creation: 05 Oct 2004
Date of revision:
Handle: RePEc:wpa:wuwpem:0410003
Note: Type of Document - pdf; pages: 18
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  1. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
  2. Hsiao, C. & Mountain, D.C. & Tsui, K.Y. & Chan, M.W.L., 1989. "Modeling Ontario Regional Electricity System Demand Using A Mixed Fixed And Random Coefficients Approach," Papers m8906, Southern California - Department of Economics.
  3. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  4. 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.
  5. Ruth Judson & Ann L. Owen, 1997. "Estimating dynamic panel data models: a practical guide for macroeconomists," Finance and Economics Discussion Series 1997-3, Board of Governors of the Federal Reserve System (U.S.).
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