Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/76265 
Year of Publication: 
2003
Series/Report no.: 
CESifo Working Paper No. 869
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper presents a new approach to estimation and inference in panel data models with unobserved common factors possibly correlated with exogenously given individual-specific regressors and/or the observed common effects. The basic idea behind the proposed estimation procedure is to filter the individual-specific regressors by means of (weighted) cross-section aggregates such that asymptotically as the cross-section dimension (N) tends to infinity the differential effects of unobserved commond factors are eliminated. The estimation procedure has the advantage that it can be computed by OLS applied to an auxiliary regression where the observed regressors are augmented by cross sectional averages of the dependent variable and the individual specific regressors. It is shown that the proposed correlated common effects (CCE) estimators for the individual-specific regressors (and its pooled counterpart) are asymptotically unbiased as N approaches infinity, both when T (the time-series dimension) is fixed, and when N and T tend to infinity jointly. A generalization of these results to multi-factor structures is also provided. The estimation and inference in dynamic heterogenous panels with a residual factor structure will be addressed in a companion paper.
Subjects: 
cross section dependence
large panels
common correlated effects
heterogeneity
estimation and inference
Document Type: 
Working Paper
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