Dynamic Panel Estimation and Homogeneity Testing under Cross Section Dependence
This paper deals with cross section dependence, homogeneity restrictions and small sample bias issues in dynamic panel regressions. To address the bias problem we develop a panel approach to median unbiased estimation that takes account of cross section dependence. The new estimators given here considerably reduce the eﬀects of bias and gain precision from estimating cross section error correlation. The paper also develops an asymptotic theory for tests of coeﬀicient homogeneity under cross section dependence, and proposes a modiﬁed Hausman test to test for the presence of homogeneous unit roots. An orthogonalization procedure is developed to remove cross section dependence and permit the use of conventional and meta unit root tests with panel data. Some simulations investigating the ﬁnite sample performance of the estimation and test procedures are reported.
Phillips, Peter C.B. and Sul, Donggyu, "Dynamic Panel Estimation and Homogeneity Testing under Cross Section Dependence" (2002). Cowles Foundation Discussion Papers. 1626.