Mean Group Estimation in Presence of Weakly Cross-Correlated Estimators

15 Pages Posted: 4 Dec 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)

Multiple version iconThere are 2 versions of this paper

Date Written: November 14, 2018

Abstract

This paper extends the mean group (MG) estimator for random coefficient panel data models by allowing the underlying individual estimators to be weakly cross correlated. Weak cross-sectional dependence of the individual estimators can arise, for example, in panels with spatially correlated errors. We establish that the MG estimator is asymptotically correctly centered, and its asymptotic covariance matrix can be consistently estimated. The random coefficient specification allows for correct inference even when nothing is known about the weak cross-sectional dependence of the errors. This is in contrast to the well known homogenous case, where cross-sectional dependence of errors results in incorrect inference unless the nature of the cross-sectional error dependence is known and can be taken into account. Evidence on small sample performance of the MG estimators are provided using Monte Carlo experiments with both strictly and weakly exogenous regressors and cross-sectionally correlated innovations.

Keywords: Mean Group Estimator, Cross Sectional Dependence, Spatial Models, Panel Data

JEL Classification: C12, C13, C23

Suggested Citation

Chudik, Alexander and Pesaran, M. Hashem, Mean Group Estimation in Presence of Weakly Cross-Correlated Estimators (November 14, 2018). USC-INET Research Paper No. 18-22, Available at SSRN: https://ssrn.com/abstract=3293365 or http://dx.doi.org/10.2139/ssrn.3293365

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

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