On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications

45 Pages Posted: 29 Jan 2006

See all articles by Alessandro Rebucci

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: April 2003

Abstract

This paper studies asymptotically the bias of the fixed effect (FE) estimator induced by cross-section heterogeneity in the slope parameters of stationary vector autoregressions (VARs). The paper also compares the FE, the mean group estimator (MG), and a simple instrumental variable alternative (IV) in Monte Carlo simulations. The main results are: (i) asymptotically, the heterogeneity bias of the FE may be more or less severe in VAR specifications than in standard dynamic panel data specifications; (ii) in Monte Carlo simulations, slope heterogeneity must be relatively high to be a source of concern for pooled estimators; (iii) when this happens, the panel must be longer than a typical macro dataset for the MG to be a viable solution.

Keywords: Dynamic Panel Data Models, Monte Carlo Simulation, Heterogeneity Bias, VARs

JEL Classification: C33, C13, C15

Suggested Citation

Rebucci, Alessandro, On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications (April 2003). IMF Working Paper No. 03/73, Available at SSRN: https://ssrn.com/abstract=879148

Alessandro Rebucci (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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