Estimation of heterogeneous panels with structural breaks

Badi H Baltagi, Qu Feng, Chihwa Kao

Research output: Contribution to journalArticle

22 Scopus citations

Abstract

This paper extends Pesaran's (2006) work on common correlated effects (CCE) estimators for large heterogeneous panels with a general multifactor error structure by allowing for unknown common structural breaks. Structural breaks due to new policy implementation or major technological shocks, are more likely to occur over a longer time span. Consequently, ignoring structural breaks may lead to inconsistent estimation and invalid inference. We propose a general framework that includes heterogeneous panel data models and structural break models as special cases. The least squares method proposed by Bai (1997a, 2010) is applied to estimate the common change points, and the consistency of the estimated change points is established. We find that the CCE estimator have the same asymptotic distribution as if the true change points were known. Additionally, Monte Carlo simulations are used to verify the main results of this paper.

Original languageEnglish (US)
Pages (from-to)176-195
Number of pages20
JournalJournal of Econometrics
Volume191
Issue number1
DOIs
StatePublished - Mar 1 2016

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Keywords

  • C33
  • JEL classification C23

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics
  • History and Philosophy of Science

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