Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence

Peter C. B. Phillips () and Donggyu Sul ()

No 1438, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N approaching infinity. The results extend earlier work by Nickell (1981) and later authors in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coe.cient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large. Some proposals for bias correction are suggested and finite sample performance is analyzed in simulations.

Keywords: Autoregression; Bias; Cross section dependence; Dynamic factors; Dynamic panel estimation; Incidental trends; Panel unit root (search for similar items in EconPapers)
JEL-codes: C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2003-09, Revised 2004-06
Note: CFP 1204.
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Published in Journal of Econometrics (March 2007), 137(1): 162-188

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Related works:
Working Paper: Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence (2004)
Journal Article: Bias in dynamic panel estimation with fixed effects, incidental trends and cross section dependence (2007)
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