Half-Panel Jackknife Fixed Effects Estimation of Panels with Weakly Exogenous Regressors

187 Pages Posted: 31 Jan 2017 Last revised: 10 Feb 2018

See all articles by Alexander Chudik

Alexander Chudik

Federal Reserve Banks - Federal Reserve Bank of Dallas

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Jui-Chung Yang

Department of Economics, National Tsing Hua University

Date Written: January 15, 2018

Abstract

This paper considers estimation and inference in linear panel regression models with lagged dependent variables and/or other weakly exogenous regressors when N (the cross section dimension) is large relative to T (the time series dimension). It allows for fixed and time effects (FE-TE) and derives a general formula for the bias of the FE-TE estimator which generalizes the well known Nickell bias formula derived for the pure autoregressive dynamic panel data models. It shows that in the presence of weakly exogenous regressors, inference based on the FE-TE estimator will result in size distortions unless N/T is sufficiently small. To deal with the bias and size distortion of FE-TE estimator the use of half-panel Jackknife FE-TE estimator is considered and its asymptotic distribution is derived. It is shown that the bias of the half-panel Jackknife FE-TE estimator is of order T‾2, and for valid inference it is only required that N/T3 → 0, as N,T → ∞ jointly. Extensions to unbalanced panel data models is also provided. The theoretical results are illustrated with Monte Carlo evidence. It is shown that the FE-TE estimator can suffer from large size distortions when N > T, with the half-panel Jackknife FE-TE estimator showing little size distortions. The use of half-panel Jackknife FE-TE estimator is illustrated with two empirical applications from the literature.

Keywords: Panel Data Models, Weakly Exogenous Regressors, Lagged Dependent Variable, Fixed Effects, Time Effects, Unbalanced Panels, Half-Panel Jackknife, Bias Correction

JEL Classification: C12, C13, C23

Suggested Citation

Chudik, Alexander and Pesaran, M. Hashem and Yang, Jui-Chung, Half-Panel Jackknife Fixed Effects Estimation of Panels with Weakly Exogenous Regressors (January 15, 2018). USC-INET Research Paper No. 18-04 (Revised). Available at SSRN: https://ssrn.com/abstract=2908521 or http://dx.doi.org/10.2139/ssrn.2908521

Alexander Chudik (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

M. Hashem Pesaran

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Jui-Chung Yang

Department of Economics, National Tsing Hua University ( email )

101, Sec. 2, Kuang-Fu Road
HsinChu, 30013
Taiwan

HOME PAGE: http://https://sites.google.com/site/juichungyang/

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