A Factor Analytical Method to Interactive Effects Dynamic Panel Models with or without Unit Root

Joakim Westerlund and Milda Norkute ()
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Milda Norkute: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden, http://www.nek.lu.se/en/contact

No 2014:12, Working Papers from Lund University, Department of Economics

Abstract: In a recent study, Bai (Fixed-Effects Dynamic Panel Models, A Factor Analytical Method. Econometrica 81, 285-314, 2013a) proposes a new factor analytic (FA) method to the estimation of dynamic panel data models, which has the unique and very useful property that it is completely bias-free. However, while certainly appealing, it is restricted to fixed effects models without a unit root. In many situations of practical relevance this is a rather restrictive consideration. The purpose of the current study is therefore to extend the FA approach to cover models with multiple interactive effects and a possible unit root.

Keywords: Interactive fixed effects; Dynamic panel data models; Unit root; Factor analytical method (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 C36 (search for similar items in EconPapers)
Pages: 100 pages
Date: 2014-04-14
New Economics Papers: this item is included in nep-ecm and nep-ets
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