On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications

April 1, 2003

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Format: Chicago

Alessandro Rebucci. On the Heterogeneity Bias of Pooled Estimators in Stationary VAR Specifications, (USA: International Monetary Fund, 2003) accessed December 26, 2024

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.

Subject: Vector autoregression, Vector error correction models

Keywords: WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/073
Stock No:

WPIEA0732003
ISBN:

9781451849486
ISSN:

1018-5941

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