On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications

Author/Editor:

Alessandro Rebucci

Publication Date:

April 1, 2003

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper studies asymptotically the bias of the fixed effect (FE) estimator induced by cross-section heterogeneity in the slope parameters of stationary vector autoregressions (VARs). The paper also compares the FE, the mean group estimator (MG), and a simple instrumental variable alternative (IV) in Monte Carlo simulations. The main results are: (i) asymptotically, the heterogeneity bias of the FE may be more or less severe in VAR specifications than in standard dynamic panel data specifications; (ii) in Monte Carlo simulations, slope heterogeneity must be relatively high to be a source of concern for pooled estimators; (iii) when this happens, the panel must be longer than a typical macro dataset for the MG to be a viable solution.

Series:

Working Paper No. 03/73

English

Publication Date:

April 1, 2003

ISBN/ISSN:

9781451849486/1018-5941

Stock No:

WPIEA0732003

Format:

Paper

Pages:

45

Please address any questions about this title to publications@imf.org