Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence

Peter Phillips and Donggyu Sul ()

Yale School of Management Working Papers from Yale School of Management

Abstract: Explicit asymptotic bias formulae are given for dynamic panel regression estimators as the cross section sample size N\rightarrow\infty. The results extend earlier work by Nickell (1981) in several directions that are relevant for practical work, including models with unit roots, deterministic trends, predetermined and exogenous regressors, and errors that may be cross sectionally dependent. The asymptotic bias is found to be so large when incidental linear trends are fitted and the time series sample size is small that it changes the sign of the autoregressive coefficient. Another finding of interest is that, when there is cross section error dependence, the probability limit of the dynamic panel regression estimator is a random variable rather than a constant, which helps to explain the substantial variability observed in dynamic panel estimates when there is cross section dependence even in situations where N is very large.

Keywords: Autoregression; bias; cross section; dependence; dynamic factors; dynamic panel estimation; incidental trends; panel unit root (search for similar items in EconPapers)
JEL-codes: C33 (search for similar items in EconPapers)
Date: 2004-07-28
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Bias in dynamic panel estimation with fixed effects, incidental trends and cross section dependence (2007)
Working Paper: Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence (2004)
Working Paper: Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ysm:somwrk:ysm428

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