Dynamic Linear Panel Regression Models with Interactive Fixed Effects

101 Pages Posted: 11 Jan 2015

See all articles by Hyungsik Roger Moon

Hyungsik Roger Moon

University of Southern California - Department of Economics; USC Dornsife Institute for New Economic Thinking

Martin Weidner

University College London - Department of Economics

Date Written: December 22, 2014

Abstract

We analyze linear panel regression models with interactive fixed effects and predetermined regressors, e.g. 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 that there are 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. A bias corrected least squares estimator is provided. We also present bias corrected versions of the three classical test statistics (Wald, LR and LM test) and show that their asymptotic distribution is a χ2-distribution. Monte Carlo simulations show that the bias correction of the LS estimator and of the test statistics also work well for finite sample sizes.

Suggested Citation

Moon, Hyungsik Roger and Weidner, Martin, Dynamic Linear Panel Regression Models with Interactive Fixed Effects (December 22, 2014). USC-INET Research Paper No. 15-02. Available at SSRN: https://ssrn.com/abstract=2546108 or http://dx.doi.org/10.2139/ssrn.2546108

Hyungsik Roger Moon (Contact Author)

University of Southern California - Department of Economics ( email )

KAP 300
Los Angeles, CA 90089-0253
United States
213-740-2108 (Phone)
213-740-8543 (Fax)

USC Dornsife Institute for New Economic Thinking ( email )

3620 S. Vermont Avenue, KAP 364F
Los Angeles, CA 90089-0253
United States

Martin Weidner

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
175
Abstract Views
978
rank
179,825
PlumX Metrics