Indirect Inference for Dynamic Panel Models

Christian Gourieroux, Peter Phillips and Jun Yu

No 1550, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: It is well-known that maximum likelihood (ML) estimation of the autoregressive parameter of a dynamic panel data model with fixed effects is inconsistent under fixed time series sample size (T) and large cross section sample size (N) asymptotics. The estimation bias is particularly relevant in practical applications when T is small and the autoregressive parameter is close to unity. The present paper proposes a general, computationally inexpensive method of bias reduction that is based on indirect inference (Gouriéroux et al., 1993), shows unbiasedness and analyzes efficiency. The method is implemented in a simple linear dynamic panel model, but has wider applicability and can, for instance, be easily extended to more complicated frameworks such as nonlinear models. Monte Carlo studies show that the proposed procedure achieves substantial bias reductions with only mild increases in variance, thereby substantially reducing root mean square errors. The method is compared with certain consistent estimators and bias-corrected ML estimators previously proposed in the literature and is shown to have superior .nite sample properties to GMM and the bias-corrected ML of Hahn and Kuersteiner (2002). Finite sample performance is compared with that of a recent estimator proposed by Han and Phillips (2005).

Keywords: Autoregression; Bias reduction; Dynamic panel; Fixed effects; Indirect inference (search for similar items in EconPapers)
JEL-codes: C33 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2006-01
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d15/d1550.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Indirect inference for dynamic panel models (2010)
Working Paper: Indirect Inference for Dynamic Panel Models (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1550

Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.

Access Statistics for this paper

More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().