Econometric Analysis of Panel Data Models with Multifactor Error Structures

Posted: 4 Sep 2019

See all articles by Hande Karabiyik

Hande Karabiyik

VU University Amsterdam - Department of Econometrics

Franz C. Palm

Maastricht University

Jean-Pierre Urbain

Maastricht University - Department of Economics

Date Written: August 2019

Abstract

Economic panel data often exhibit cross-sectional dependence, even after conditioning on appropriate explanatory variables. Two approaches to modeling cross-sectional dependence in economic panel data are often used: the spatial dependence approach, which explains cross-sectional dependence in terms of distance among units, and the residual multifactor approach, which explains cross-sectional dependence by common factors that affect individuals to a different extent. This article reviews the theory on estimation and statistical inference for stationary and nonstationary panel data with cross-sectional dependence, particularly for models with a multifactor error structure. Tests and diagnostics for testing for unit roots, slope homogeneity, cointegration, and the number of factors are provided. We discuss issues such as estimating common factors, dealing with parameter plethora in practice, testing for structural stability and nonlinearity, and dealing with model and parameter uncertainty. Finally, we address issues related to the use of these economic panel models.

Suggested Citation

Karabiyik, Hande and Palm, Franz C. and Urbain, Jean-Pierre, Econometric Analysis of Panel Data Models with Multifactor Error Structures (August 2019). Annual Review of Economics, Vol. 11, pp. 495-522, 2019. Available at SSRN: https://ssrn.com/abstract=3445876 or http://dx.doi.org/10.1146/annurev-economics-063016-104338

Hande Karabiyik

VU University Amsterdam - Department of Econometrics

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Franz C. Palm (Contact Author)

Maastricht University ( email )

Jean-Pierre Urbain

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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