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Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence

Author

Listed:
  • Peter C.B. Phillips

    (Yale University, Cowles Foundation)

  • Donggyu Sul

    (University of Auckland, Faculty of Business & Economics, Department of Economics)

Abstract
Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N\rightarrow\infty. The results extend earlier work by Nickell (1981) in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coefficient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large.

Suggested Citation

  • Peter C.B. Phillips & Donggyu Sul, 2004. "Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence," Yale School of Management Working Papers ysm428, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm428
    as

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    References listed on IDEAS

    as
    1. Moon, Hyungsik R. & Phillips, Peter C.B., 2000. "Estimation Of Autoregressive Roots Near Unity Using Panel Data," Econometric Theory, Cambridge University Press, vol. 16(6), pages 927-997, December.
    2. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    3. repec:bla:obuest:v:61:y:1999:i:0:p:711-47 is not listed on IDEAS
    4. Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
    5. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296, Elsevier.
    6. Hyungsik Roger Moon & Peter C. B. Phillips, 2004. "GMM Estimation of Autoregressive Roots Near Unity with Panel Data," Econometrica, Econometric Society, vol. 72(2), pages 467-522, March.
    7. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    8. Hyungsik R. Moon & Peter C.B. Phillips, 1999. "Maximum Likelihood Estimation in Panels with Incidental Trends," Cowles Foundation Discussion Papers 1246, Cowles Foundation for Research in Economics, Yale University.
    9. 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.
    10. Hugo Kruiniger, 2000. "GMM Estimation of Dynamic Panel Data Models with Persistent Data," Working Papers 428, Queen Mary University of London, School of Economics and Finance.
    11. 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.
    12. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    13. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
    14. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    15. 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.
    16. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation for Research in Economics, Yale University.
    17. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation for Research in Economics, Yale University.
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    19. repec:auc:wpaper:194 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Autoregression; bias; cross section; dependence; dynamic factors; dynamic panel estimation; incidental trends; panel unit root;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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