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Consistency in Estimation and Model Selection of Dynamic Panel Data Models with Fixed Effects

Cardiff Business School, Cardiff University, Aberconway Building, Colum Drive, Cardiff CF10 3EU, UK
Academic Editor: Kerry Patterson
Econometrics 2015, 3(3), 494-524; https://doi.org/10.3390/econometrics3030494
Received: 27 February 2015 / Accepted: 16 June 2015 / Published: 10 July 2015
We examine the relationship between consistent parameter estimation and model selection for autoregressive panel data models with fixed effects. We find that the transformation of fixed effects proposed by Lancaster (2002) does not necessarily lead to consistent estimation of common parameters when some true exogenous regressors are excluded. We propose a data dependent way to specify the prior of the autoregressive coefficient and argue for comparing different model specifications before parameter estimation. Model selection properties of Bayes factors and Bayesian information criterion (BIC) are investigated. When model uncertainty is substantial, we recommend the use of Bayesian Model Averaging to obtain point estimators with lower root mean squared errors (RMSE). We also study the implications of different levels of inclusion probabilities by simulations. View Full-Text
Keywords: dynamic panel data model with fixed effects; incidental parameter problem; consistency in estimation; model selection; bayesian model averaging dynamic panel data model with fixed effects; incidental parameter problem; consistency in estimation; model selection; bayesian model averaging
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Li, G. Consistency in Estimation and Model Selection of Dynamic Panel Data Models with Fixed Effects. Econometrics 2015, 3, 494-524.

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