Panel Data Linear Models Dynamic panel linear models
Dynamic Panel Linear Model Yit =
p X
δj ∗ Yit−j +
j=1
K X
Xitk ∗ βk + it
;
it = ¾i + νit
k=1
Basic problems Yit is a function of Âľi ⇒ Yit−1 is a function of Âľi . Thus, OLS is biased because corr ( it , Yit−1 ) 6= 0. The within transformation for FE wipes out Âľi . However, ( ÂŻi ) contains it−1 , which is in turn correlated with Yit−1 . The fixed effects estimator is then biased of order O(1/T) and inconsistent for large N and fixed T
Gustavo Sanchez (StataCorp)
June 22-23, 2012
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