Persistence Heterogeneity Testing in Panels with Interactive Fixed Effects

Yunus Emre Ergemen () and Carlos Velasco
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Yunus Emre Ergemen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Aarhus University, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We consider large N,T panel data models with fixed effects, a common factor allowing for cross-section dependence, and persistent data and shocks, which are assumed fractionally integrated. In a basic setup, the main interest is on the fractional parameter of the idiosyncratic component, which is estimated in first differences after factor removal by projection on the cross-section average. The pooled conditional-sum-of-squares estimate is root-NT consistent but the normal asymptotic distribution might not be centered, requiring the time series dimension to grow faster than the cross-section size for correction. We develop tests of homogeneity of dynamics, including the degree of integration, that have no trivial power under local departures from the null hypothesis of a non-negligible fraction of cross-section units. A simulation study shows that our estimates and test have good performance even in moderately small panels.

Keywords: Fractional integration; panel data; factor models; long memory; homogeneity test (search for similar items in EconPapers)
JEL-codes: C22 C23 (search for similar items in EconPapers)
Pages: 59
Date: 2018-03-12
New Economics Papers: this item is included in nep-ecm and nep-ets
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https://repec.econ.au.dk/repec/creates/rp/18/rp18_11.pdf (application/pdf)

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Journal Article: Persistence Heterogeneity Testing in Panels with Interactive Fixed Effects (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2018-11

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