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Robust tests for time-invariant individual heterogeneity versus dynamic state dependence

Zincenko, F., Sosa-Escudero, W. and Montes-Rojas, G. (2014). Robust tests for time-invariant individual heterogeneity versus dynamic state dependence. Empirical Economics, 47(4), pp. 1365-1387. doi: 10.1007/s00181-013-0788-0

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Abstract

We derive tests for persistent effects in a general linear dynamic panel data context. Two sources of persistent behavior are considered: time-invariant unobserved factors (captured by an individual random effect) and dynamic persistence or “state dependence” (captured by autoregressive behavior). We will use a maximum likelihood framework to derive a family of tests that help researchers learn whether persistence is due to individual heterogeneity, dynamic effect, or both. The proposed tests have power only in the direction they are designed to perform, that is, they are locally robust to the presence of alternative sources of persistence, and consequently, are able to identify which source of persistence is active. A Monte Carlo experiment is implemented to explore the finite sample performance of the proposed procedures. The tests are applied to a panel data series of real GDP growth for the period 1960–2005.

Publication Type: Article
Additional Information: The final publication is available at Springer via http://dx.doi.org/10.1007/s00181-013-0788-0
Publisher Keywords: Dynamic panel, local misspecification, random effects, testing
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics
URI: http://openaccess.city.ac.uk/id/eprint/12026
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