Advanced Econometrics PhD Course Analysis of Heterogeneous Panel Data Models PhD 11

M. Hashem Pesaran Cambridge University October 2007

This course provides an up-to-date coverage of the various econometric issues that arise in the analysis of dynamic panel data models. It is intended for those interested in getting acquainted with the econometric techniques needed to carry out analyses of time series across countries, regions, and/or industries. Consideration will be given to the different cases arising in practice where either the number of groups (N) or the number of time periods (T), or both, is reasonably large. The course begins with a very brief review of the fixed and random effects static panel models, and discusses the problems of estimation and hypothesis testing in these models both when N and T are large, and when N is large but T is small. The focus of the course will, however, be on panels with both N and T large and of the same order of magnitude. Among the various estimation procedures we consider the SURE, the mean group and the pooled mean group estimators. Particularly attention will be paid to the specific issues that arise in the analysis of nonstationary variables in panels, including issues such as testing for unit roots and cointegration in panels. The problem of cross dependence in large panels will also be addressed. Lecture Times: Wednesdays, 2:00pm-4:00pm, starting on Wednesday October 3rd and ending on Wednesday October 31st. Venue: Meade Room, Faculty of Economics

Readings
Section A: Books
Arellano, M. (2003), Panel Data Econometrics, Oxford: Oxford University Press. Baltagi, B.H., (2001), Econometric Analysis of Panel Data, Second Edition, John Wiley. Hsiao, C., (2003), Analysis of Panel Data, Second Edition, Cambridge University Press. Wooldridge, J. M., (2002), Econometric Analysis of Cross Section and Panel Data, MIT Press. Also relevant chapters in the following econometrics texts provide useful introduction to the course:

Greene, W. H., (1999), Econometric Analysis, (Fourth Edition), Prentice Hall. Wooldridge, J.A., (1999), Introductory Econometrics, South-Western College Publishing.

Section B: Articles
I. Fixed and Random Effects Models *[1.1] Hausman, J.A. and W.E. Taylor, (1981), Panel Data and Unobservable Individual Effects, Econometrica, Vol. 49, pp. 1377-1398. [1.2] Maddala, G.S., (1971a), The Likelihood Approach to Pooling Cross-Section and TimeSeries Data, Econometrica, Vol. 39, pp. 939-953. *[1.3] Maddala, G.S., (1971b), The Use of Variance Components Models in Pooling CrossSection and Time-Series Data, Econometrica, Vol. 39, pp. 341-360. [1.4] Mundlak, Y., (1978), On the Pooling of Time Series and Cross Section Data, Econometrica, Vol. 46, pp. 69-85. [1.5] Swamy, P.A.V.B. (1970), Efficient Inference in Random Coefficient Regression Model, Econometrica, 38, 311-23. II. Dynamic Panel Data Models with Homogeneous Slopes *[2.1] Ahn, S.C. and P. Schmidt, (1995), Efficient Estimation of Models for Dynamic Panel Data, Journal of Econometrics, Vol. 68, pp. 5-27. [2.2] Amemiya, T. and T.E. MaCurdy, (1986), Instrumental-Variable Estimation of an ErrorComponents Model, Econometrica, Vol. 54, pp. 869-880. *[2.3] Anderson, T.W. and C. Hsiao, (1981), Estimation of Dynamic Models with Error Components, Journal of the American Statistical Association, Vol. 76, pp. 598-606. [2.4] Anderson, T.W. and C. Hsiao, (1982), Formulation and Estimation of Dynamic Models Using Panel Data, Journal of Econometrics, Vol. 18, pp. 47-82. *[2.5] Arellano, M. and S. Bond, (1991), Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, Review of Economic Studies, Vol. 58, pp. 277-297. [2.6] Arellano, M. and O. Bover, (1995), Another Look at the Instrumental Variable Estimation of Error-Components Models, Journal of Econometrics, Vol. 68, pp. 29-51.
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*[2.7] Balestra, P. and M. Nerlove, (1966), Pooling Cross Section and Time Series Data in the Estimation of a Dynamic Model: The Demand for Natural Gas, Econometrica, Vol. 34, pp. 585612. [2.8] Bhargava, A. and J.D. Sargan, (1983), Estimating Dynamic Random Effects Models from Panel Data Covering Short Time Periods, Econometrica, Vol. 51, pp. 1635-1659. *[2.9] Binder, M., C. Hsiao, and M. H. Pesaran, 2005. Estimation and inference in short panel vector autoregressions with unit roots and cointegration, Econometric Theory, 21, 795-837. [2.10] Blundell, R. and S. Bond, (1998), Initial Conditions and Moment Restrictions in Dynamic Panel Data Models, Journal of Econometrics, Vol. 87, pp. 115-143. [2.11] Holtz-Eakin, D., W. Newey, and H.S. Rosen, (1988), Estimating Vector Autoregressions with Panel Data, Econometrica, Vol. 56, pp. 1371-1395. *[2.12] Hsiao, C., M.H. Pesaran, and A.K. Tahmiscioglu, (2002), Maximum Likelihood Estimation of Fixed Effects Dynamic Panel Data Models Covering Short Time Periods, Journal of Econometrics, Vol. 109, pp.107-150. *[2.13] Nickell, S., (1981), Biases in Dynamic Models with Fixed Effects, Econometrica, Vol. 49, pp. 1417-1426. III. Dynamic Panel Data Models with Heterogeneous Slopes [3.1] Canova, F. and A. Marcet, (1998), The Poor Stay Poor: Non-Convergence Across Countries and Regions, Unpublished Manuscript, Universitat Pompeu Fabra. [3.2] Hsiao, C., and M. H. Pesaran (2007), Random Coefficient Panel Data Models, in L. Matyas and P. Sevestre, (eds.), The Econometrics of Panel Data, Kluwer Academic Publishers (forthcoming). [3.3] Hsiao, C., M.H. Pesaran, and A.K. Tahmiscioglu, (1999), Bayes Estimation of Short-Run Coefficients in Dynamic Panel Data Models, in C. Hsiao, K. Lahiri, L.-F. Lee, and M.H. Pesaran (eds.), Analysis of Panels and Limited Dependent Variables: A Volume in Honour of G. S. Maddala, Cambridge University Press, pp. 268-296. *[3.4] Pesaran, M.H. and R. Smith, (1995), Estimating Long-Run Relationships from Dynamic Heterogeneous Panels, Journal of Econometrics, Vol. 68, pp. 79-113. Phillips, P.C.B., and H.R. Moon (1999), Linear Regression Theory for Nonstationary Panel Data, Econometrica, 67, pp. 1057-1111.

IV. Analysis of Large Panels with Cross Section Dependence [4.1] Ahn, S.G., Y,H, Lee and Schmidt, P. (2001), GMM Estimation of Linear Panel Data Models with Time-varying Individual Effects, Journal of Econometrics, 102, 219-255. [4.2] Anselin, L. (2001), "Spatial Econometrics", in B. Baltagi (ed.), A Companion to Theoretical Econometrics, Blackwell, Oxford. [4.4] Pesaran, M.H., (2006), Estimation and Inference in Large Heterogeneous Panels with Cross Section Dependence, Econometrica, 74, 967-1012. [4.5] Pesaran, M.H., T. Schuermann, and S.M. Weiner (2004), Modelling Regional Interdependencies Using a Global Error-Correcting Macroeconometric Model, Journal of Business and Economic Statistics, 22, 129-162. [4.6] Pesaran, M.H. and E. Tosetti, (2007), Large Panels with Common Factors and Spatial Correlations, IZA DP Series, 3032. V. Testing for Unit Roots and Cointegration in Panels [5.1] Bai, J. and S. Ng (2004), A Panic Attack on Unit Roots and Cointegration, Econometrica, 72, 1127-1177. [5.2] Breitung, J. and M.H. Pesaran, 2007. Unit roots and cointegration in panels, in Matyas, L. and Sevestre, P. (eds.), The Econometrics of Panel Data, Fundamentals and Recent Developments in Theory and Practice, (3rd Edition), Dordrecht, Kluwer, forthcoming. *[5.3] Im, K.S., M.H. Pesaran, and Y. Shin, 2003. Testing for unit roots in heterogeneous panels, Journal of Econometrics, 115, 53-74. [5.4] Kao, C., (1999), Spurious Regression and Residual-Based Tests for Cointegration in Panel Data, Journal of Econometrics, Vol. 90, pp. 1-44. *[5.5] Levin, A. and C.F. Lin, C.-S. J. Chu, (2002), Unit Root Tests in Panel Data: Asymptotic and Finite Sample Properties, Journal of Econometrics, 108, pp. 1-24. *[5.6] Moon, R. and B. Perron (2004), Testing for Unit Root in Panels with Dynamic Factors, Journal of Econometrics, 122, 81-126. *[5.7] Pesaran, M.H. (2007), A Simple Panel Unit Root Test in the Presence of Cross Section Dependence, Journal of Applied Econometrics, 22, pp. 265-312. *[5.8] Pesaran, M.H., Y. Shin, and R. Smith, (1999), Pooled Mean Group Estimation of Dynamic Heterogeneous Panels, Journal of the American Statistical Association, Vol. 94, pp. 621-634.
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*[5.9] Pedroni, P., (2004), Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis, Econometric Theory, 20, 597--625. VI. Multi-Country Analysis of Consumption and Saving [6.1] Attanasio, O.P., L. Picci, and A. Scorcu, (2000), Saving, Growth and Investment: A Macroeconomic Analysis Using a Panel of Countries, Review of Economics and Statistics, 82, pp. 182-211. [6.2] Carroll, C.D. and D.N. Weil, (1994), Saving and Growth: A Reinterpretation, CarnegieRochester Conference Series on Public Policy, Vol. 40, pp. 133-192. *[6.3] Haque, N.U., M.H. Pesaran, and S. Sharma, (2000), Neglected Heterogeneity and Dynamics in Cross-Country Savings Regressions, in J. Krishnakumar and E. Ronchetti (eds.): Panel Data Econometrics - Future Directions: Papers in Honour of Professor Balestra, Elsevier Science. *[6.4] Masson, P.R., T. Bayoumi, and H. Samiei, (1998), International Evidence on the Determinants of Private Saving, World Bank Economic Review, Vol. 12, pp. 483-501. [6.5] Schmidt-Hebbel, K. and L. Servn, (1999), Saving in the World: The Stylized Facts, in K. Schmidt-Hebbel and L. Servn (eds.), The Economics of Saving and Growth: Theory, Evidence, and Implications for Policy, Cambridge University Press, pp. 6-32. VII. Multi-Country Analysis of Growth and Convergence *[7.1] Barro, R., (1991), Economic Growth in a Cross Section of Countries, Quarterly Journal of Economics, Vol. 106, pp. 407-443. [7.2] Bernard, A.B. and S.N. Durlauf, (1995), Convergence in International Output, Journal of Applied Econometrics, Vol. 10, pp. 97-108. [7.3] Caselli, F., G. Esquivel, and F. Lefort, (1996), Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics, Journal of Economic Growth, Vol. 1, pp. 363-390. [7.4] Islam, N., (1995), Growth Empirics: A Panel Data Approach, Quarterly Journal of Economics, Vol. 110, pp. 1127-1170. *[7.5] Lee, K., M.H. Pesaran, and R. Smith, (1997), Growth and Convergence in a MultiCountry Empirical Stochastic Solow Model, Journal of Applied Econometrics, Vol. 12, pp. 357392. *[7.6] Lee, K., M.H. Pesaran, and R. Smith, (1998), Growth Empirics: A Panel Data Approach A Comment, Quarterly Journal of Economics, Vol. 113, pp. 319-323.
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[7.7] Mankiw, N.G., D. Romer, and D.N. Weil, (1992), A Contribution to the Empirics of Economic Growth, Quarterly Journal of Economics, Vol. 107, pp. 407-437.
*[7.8] Pesaran, M. Hashem, (2007), A Pair-Wise Approach To Testing For Output And Growth

Convergence", Journal of Econometrics, 138, 312-355. [7.9] Temple, J., (1998), The New Growth Evidence, Journal of Economic Literature, Vol. 37, pp. 112-156. VIII. Multi-Country Analysis of Energy Demand [8.1] Griffin, J.M., (1979), Energy Conservation in the OECD: 1980 to 2000, Ballinger. [8.2] Pesaran, M.H., R.P. Smith, and T. Akiyama, (1998), Energy Demand in Asian Developing Economies, Oxford University Press. [8.3] Pindyck, R.S., (1979), The Structure of World Energy Demand, MIT Press.