A Varying Coefficient Model with Two-way Fixed Effects and Different Smoothing Variables

Taining Wang (taining.wang@cueb.edu.cn) and Feng Yao
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Feng Yao: West Virginia University, Department of Economics

No 21-01, Working Papers from Department of Economics, West Virginia University

Abstract: We propose a varying coefficient regression model for panel data that controls for both latent heterogeneities in cross-sectional units and unobserved common shocks over time. The model allows different smoothing variables to enter through either a stand-alone function or a coefficient function. Without requiring a normalization of the fixed effects, we propose a two-step estimator. First, we estimate the varying coefficients with the pilot series-based estimators, eliminating fixed effects though differencing. Second, we perform a one-step kernel backfitting to improve the estimation efficiency. We demonstrate through Monte-Carlo simulations that our estimators are computationally efficient and perform well relative to a profile-based kernel estimator.

Keywords: semiparametric model; varying coefficient model; different smoothing variables; two-way fixed effects; series estimation; kernel backfitting (search for similar items in EconPapers)
JEL-codes: C14 C15 C22 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2021-10
New Economics Papers: this item is included in nep-ecm and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:wvu:wpaper:21-01

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