Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors

By A. Chudik, M. Pesaran. Social Science Research Network, 2015

2,069 citations recorded by the source corpus.

This paper extends the Common Correlated Effects (CCE) approach developed by Pesaran (2006) to heterogeneous panel data models with lagged dependent variable and/or weakly ex-ogenous regressors. We show that the CCE mean group estimator continues to be valid but the following two conditions must be satisfied to deal with the dynamics: a sufficient number of lags of cross section averages must be included in individual equations of the panel, and the number of cross section averages must be at least as large as the number of unobserved common factors. We establish consistency rates, derive the asymptotic distribution, suggest using covariates to deal with the effects of multiple unobserved common factors, and consider jackknife and recursive de-meaning bias correction procedures to mitigate the small sample time series bias. Theoretical findings are accompanied by extensive Monte Carlo experiments, which show that the proposed estimators perform well so long as the time series dimension of the panel is sufficiently large.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/f4374c44c661325314b08b9066ca382bfe22e7bc

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In Economics and Econometrics

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Citations in the corpus

• Public debt and growth: Heterogeneity and non-linearity (2015, background): “8 These common factors can be a combination of ‘strong’ factors, representing global shocks such as the recent financial crisis, the 1970s oil crises or the emergence of China as a major economic power; and ‘weak’ factors, capturing local spillover effects along channels determined by shared culture”
• Quantile regression with nonadditive fixed effects (2022, background): “A related literature develops quantile panel data methods with correlated random effects (Geraci andBottai 2007;Abrevaya andDahl 2008;Grahamet al. 2015;Arellano and Bonhomme 2016; Cai et al. 2018; Harding et al. 2020).”
• Renewable energy policies and contradictions in causality: A case of Next 11 countries (2018, methodology): “The strength of the cross-sectional dependence is further checked by Chudik and Pesaran (2015) test, with the null hypothesis of weak cross-sectional dependence.”
• Dynamic Spatial Panel Models: Networks, Common Shocks, and Sequential Exogeneity (2018, neutral): “we define ut (θ0, γσ) = ∑T s=tπts (f0, γσ)us = ∑T s=tπts (f0, γσ)Rs(ρ0) [ys −Wsδ0] , (18) with the weights πts(.”