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Consistent estimation, model selection and averaging of dynamic panel data models with fixed effect

Li, Guangjie 2009. Consistent estimation, model selection and averaging of dynamic panel data models with fixed effect. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University. Available at: http://business.cardiff.ac.uk/cymraeg/research/wor...

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Abstract

In the context of an autoregressive panel data model with fixed effect, we examine the relationship between consistent parameter estimation and consistent model selection. Consistency in parameter estimation is achieved by using the tansformation of the fixed effect proposed by Lancaster (2002). We find that such transformation does not necessarily lead to consistent estimation of the autoregressive coefficient when the wrong set of exogenous regressors are included. To estimate our model consistently and to measure its goodness of fit, we argue for comparing different model specifications using the Bayes factor rather than the Bayesian information criterion based on the biased maximum likelihood estimates. When the model uncertainty is substantial, we recommend the use of Bayesian Model Averaging. Finally, we apply our method to study the relationship between financial development and economic growth. Our findings reveal that stock market development is positively related to economic growth, while the effect of bank development is not as significant as the classical literature suggests.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Uncontrolled Keywords: Bayesian Model Averaging, consistency in estimation, dynamic panel data model with fixed effect, Economics, finance and growth, incidental parameter problem, model selection
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 04 Jun 2017 04:41
URI: http://orca.cf.ac.uk/id/eprint/42902

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