Neglected dynamics in panel data models; consequences and detection in finite samples*

I. T. van den Doel and Jan Kiviet

Statistica Neerlandica, 1995, vol. 49, issue 3, 343-361

Abstract: The bias of various estimators for static cross‐section and panel data models is assessed in a simulation study, where the actual data generating process is a dynamic adjustment mechanism with random individual effects. It is concluded that the consequences of incorrectly estimating a static model can be rather serious. Therefore, it is important to have an accurate technique available for the detection of dynamics. Two exact similar tests for the presence of a lagged dependent variable in panel data models are developed; in some simulation experiments these tests outperform standard asymptotic test procedures. Empirical results on Engle curves for food illustrate the above issues.

Date: 1995
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