Small Sample Properties of Panel Time-Series Estimators with I(1) Errors

Birkbeck College Discussion Paper No. 3/2001

Cass Business School Research Paper

32 Pages Posted: 23 Jun 2001

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Jerry Coakley

University of Essex - Essex Business School

Ron Smith

Birkbeck College

Date Written: July 2001

Abstract

Monte Carlo simulations are used to explore the small sample properties of a mean group and two pooled panel estimators of a regression coefficient when the regressor is I(1). We compare and contrast the effect of I(0) and I(1) errors and homogeneous and heterogeneous coefficients in a design based on two typical PPP panels. The results confirm that the asymptotic theory is relevant to practical applications. With I(0) errors and homogeneous coefficients, the estimators are unbiased, dispersion depends on the signal-noise ratio and falls at rate T(root-N) as expected. With I(1) errors and no cointegration, the estimators are unbiased and dispersion falls at rate root-N. When heterogeneity with I(0) errors is introduced, the dispersion of the pooled estimators falls at rate root-N but that of the mean group continues to fall at rate T(root-N). Finally, the pooled estimators are likely to lead to distorted inference both in the case of I(1) errors and of I(0) errors with heterogeneous coefficients. The mean group estimators, however, are generally correctly sized. An application to a panel of OECD economies suggests that the PPP hypothesis-nominal exchange rates and price differentials move one-for-one in the long run-seems to hold even if real exchange rates are subject to permanent shocks.

Keywords: Monte Carlo, response surface, spurious regression, PPP

JEL Classification: C32, F31

Suggested Citation

Fuertes, Ana-Maria and Coakley, Jerry and Smith, Ron P., Small Sample Properties of Panel Time-Series Estimators with I(1) Errors (July 2001). Birkbeck College Discussion Paper No. 3/2001; Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=273252 or http://dx.doi.org/10.2139/ssrn.273252

Ana-Maria Fuertes

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Jerry Coakley (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom
+44 1206 872455 (Phone)
+44 1206 873429 (Fax)

HOME PAGE: http://www.essex.ac.uk/afm/staff/coakley.shtm

Ron P. Smith

Birkbeck College ( email )

Malet Street
London WC1E 7HX
United Kingdom
+44 207 631 6413 (Phone)
+44 207 631 6416 (Fax)

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