The PCSE Estimator is Good -- Just Not as Good as You Think

W. Reed () and Rachel Webb

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: This paper investigates the properties of the Panel-Corrected Standard Error (PCSE) estimator. The PCSE estimator is commonly used when working with time-series, crosssectional (TSCS) data. In an influential paper, Beck and Katz (1995) (henceforth BK) demonstrated that FGLS produces coefficient standard errors that are severely underestimated. They report Monte Carlo experiments in which the PCSE estimator produces accurate standard error estimates at no, or little, loss in efficiency compared to FGLS. Our study further investigates the properties of the PCSE estimator. We first reproduce the main experimental results of BK using their Monte Carlo framework. We then show that the PCSE estimator does not perform as well when tested in data environments that better resemble “practical research situations.” When (i) the explanatory variable(s) are characterized by substantial persistence, (ii) there is serial correlation in the errors, and (iii) the time span of the data series is relatively short, coverage rates for the PCSE estimator frequently fall between 80 and 90 percent. Further, we find many “practical research situations” where the PCSE estimator compares poorly with FGLS on efficiency grounds.

Keywords: Panel data estimation; Monte Carlo analysis; FGLS; Parks; PCSE; finite sample (search for similar items in EconPapers)
JEL-codes: C15 C23 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010-08-13
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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Journal Article: The PCSE Estimator is Good -- Just Not As Good As You Think (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:10/53

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