Dynamic linear panel regression models with interactive fixed effects

Hyungsik Roger Moon, Martin Weidner

Research output: Contribution to journalArticlepeer-review

39 Citations (Scopus)

Abstract

We analyze linear panel regression models with interactive fixed effects and predetermined regressors, for example lagged-dependent variables. The first-order asymptotic theory of the least squares (LS) estimator of the regression coefficients is worked out in the limit where both the cross-sectional dimension and the number of time periods become large. We find two sources of asymptotic bias of the LS estimator: bias due to correlation or heteroscedasticity of the idiosyncratic error term, and bias due to predetermined (as opposed to strictly exogenous) regressors. We provide a bias-corrected LS estimator. We also present bias-corrected versions of the three classical test statistics (Wald, LR, and LM test) and show their asymptotic distribution is a χ2-distribution. Monte Carlo simulations show the bias correction of the LS estimator and of the test statistics also work well for finite sample sizes.

Original languageEnglish
Pages (from-to)158-195
Number of pages38
JournalEconometric Theory
Volume33
Issue number1
DOIs
Publication statusPublished - 2017 Feb 1

Bibliographical note

Funding Information:
Moon is grateful for the financial support from the NSF via grant SES 0920903 and the faculty development award from USC. Weidner acknowledges support from the Economic and Social Research Council through the ESRC Centre for Microdata Methods and Practice grant RES-589-28-0001.

All Science Journal Classification (ASJC) codes

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

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