Nickell Bias in Panel Local Projection: Financial Crises Are Worse Than You Think

Ziwei Mei, Liugang Sheng () and Zhentao Shi

Papers from arXiv.org

Abstract: Panel local projection (LP) with fixed-effects (FE) estimation is widely adopted for evaluating the economic consequences of financial crises across countries. This paper highlights a fundamental methodological issue: the presence of the Nickell bias in the panel FE estimator due to inherent dynamic structures of panel predictive specifications, even if the regressors have no lagged dependent variables. The Nickell bias invalidates the standard inferential procedure based on the $t$-statistic. We propose the split-panel jackknife (SPJ) estimator as a simple, easy-to-implement, and yet effective solution to eliminate the bias and restore valid statistical inference. We revisit four influential empirical studies on the impact of financial crises, and find that the FE method underestimates the economic losses of financial crises relative to the SPJ estimates.

Date: 2023-02, Revised 2025-09
New Economics Papers: this item is included in nep-ecm
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