The Factor Analytical Approach in Trending Near Unit Root Panels

Milda Norkute (), Joakim Westerlund and Ovidijus Stauskas
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Milda Norkute: Bank of Lithuania, Vilnius University
Ovidijus Stauskas: Lunk University

No 91, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: In this study, we re-visit the factor analytical (FA) approach for (near unit root) dynamic panel data models, whose asymptotic distribution has been shown to be normal and well centered at zero without the need for valid instruments or correction for bias. It is therefore very appealing. The question is: Does the appeal of FA, which so far has only been documented for fixed effects panels, extends to panels with incidental trends? This is an important question, because many persistent variables are trending. The answer turns out to be negative. In particular, while consistent, the asymptotic normality of FA breaks down when there is an exact unit root present, which limits its applicability.

Keywords: Dynamic panel data models; Unit root; Factor analytical method. (search for similar items in EconPapers)
JEL-codes: C12 C13 C33 (search for similar items in EconPapers)
Pages: 91 pages
Date: 2021-07-29
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: The factor analytical approach in trending near unit root panels (2022)
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