Initial-Condition Free Estimation of Fixed Effects Dynamic Panel Data Models

Zhenlin Yang

No 16-2014, Working Papers from Singapore Management University, School of Economics

Abstract: It is well known that (quasi) MLE of dynamic panel data (DPD) models with short panels depends on the assumptions on the initial values; ignoring them or a wrong treatment of them will result in inconsistency or serious bias. This paper introduces a initial-condition free method for estimating the fixed-effects DPD models, through a simple modification of the quasi-score. An outer-product-of-gradients (OPG) method is also proposed for robust inference. The MLE of Hsiao, Pesaran and Tahmiscioglu (2002, Journal of Econometrics), where the initial observations are modeled, is extended to quasi MLE and an OPG method is proposed for robust inference. Consistency and asymptotic normality for both estimation strategies are established, and the two methods are compared through Monte Carlo simulations. The proposed method performs well in general, whether the panel is short or not. The quasi MLE performs comparably, except when model does not contain time-varying regressor, or the panel is not short and the dynamic parameter is small. The proposed method is much simpler and easier to apply.

Keywords: Bias reduction; Consistency; Asymptotic normality; Dynamic panel; Fixed effects; Modified quasi-score; Robust standard error; Short panel (search for similar items in EconPapers)
JEL-codes: C10 C13 C15 C23 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2014-09
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-ore and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in SMU Economics and Statistics Working Paper Series

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