Heterogeneity and Dynamic Dependence in Panel Analysis of Individual Behavior

Kannika Damrongplasit and Cheng Hsiao

A chapter in Essays in Honor of M. Hashem Pesaran: Panel Modeling, Micro Applications, and Econometric Methodology, 2022, vol. 43B, pp 61-79 from Emerald Group Publishing Limited

Abstract: The authors use a reduced form state-dependent labor participation decision model to illustrate that parameter stability is achieved only if a model properly takes account the observed sample heterogeneity and unobserved sample heterogeneity provided (external) conditions of a model stay constant. Our analysis of the dynamic response path to a health shock using Australian HILDA panel data from 2002 to 2009 shows that experiencing an event by itself can only have a temporary effects. The long-run equilibrium condition is independent of initial conditions or shocks that do not last. In other words, if experiencing an event does not lead to changes in the response parameters such as the real business cycle (Kydland & Prescott, 1977,1982) or dynamic stochastic general equilibrium model (DSGE, e.g., Sbordone et al., 2010) assumed, policy change may only change the short-run response path. There is no long-term impact for a policy change. On the other hand, if a policy change leads to changes in the decision rules (e.g., the recent US–China trade friction) as the Lucas critique (1976) implies, then there is no other way to evaluate the impact of a policy except to explicitly model how agents respond to the policy change.

Keywords: Lucas critique; heterogeneity; panel dynamic binary choice models; short- and long-run relations; health shock; labor participation; dynamic stochastic general equilibrium model (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-90532021000043b004

DOI: 10.1108/S0731-90532021000043B004

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