On the two algorithms for estimating interactive fixed effects models in Bai (2009)

Qiang Chen and Guanpeng Yan

Economics Letters, 2023, vol. 233, issue C

Abstract: In an influential paper, Bai (2009) estimates the interactive fixed effects models by iterating between OLS and PCA until convergence. Bai (2009) proposes two algorithms, one for deriving the limiting theory, while the other for implementation. But the relation between these two algorithms has not been adequately addressed in the literature. We show that the nonlinear simultaneous equations characterizing these two algorithms have the same solutions, but the convergent paths are different in general. We conduct Monte Carlo simulations to compare the statistical and convergent properties of these two algorithms, and find patterns different from previous beliefs.

Keywords: Interactive fixed effects; Least squares; Principal components (search for similar items in EconPapers)
JEL-codes: C13 C23 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523004214

DOI: 10.1016/j.econlet.2023.111395

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