On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications

Author/Editor:

Alessandro Rebucci

Publication Date:

April 1, 2003

Electronic Access:

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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. 2003/073

Subject:

Vector autoregression Vector error correction models

English

Publication Date:

April 1, 2003

ISBN/ISSN:

9781451849486/1018-5941

Stock No:

WPIEA0732003

Pages:

45

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