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Structural Changes in Heterogeneous Panels with Endogenous Regressors

Badi Baltagi (), Qu Feng () and Chihwa Kao
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Chihwa Kao: Department of Economics, University of Connecticut

No 214, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

Abstract: This paper extends Pesaran (2006) common correlated e¤ects (CCE) by allowing for endogenous regressors in large heterogeneous panels with unknown common structural changes in slopes and error factor structure. Since endogenous regressors and structural breaks are often encountered in empirical studies with large panels, this extension makes the Pesaran’s (2006) CCE approach empirically more appealing. In addition to allowing for slope heterogeneity and cross-sectional dependence, we find that Pesaran’s CCE approach is also valid when dealing with unobservable factors in the presence of endogenous regressors and structural changes in slopes and error factor loadings. This is supported by Monte Carlo experiments.

Keywords: Structural Changes; Heterogeneous Panels; Common Correlated Effects; Endogeneity (search for similar items in EconPapers)
JEL-codes: C23 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-sea
Date: 2019-04
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