Publication Type

Journal Article

Version

Preprint

Publication Date

5-2015

Abstract

In this paper, we propose a consistent nonparametric test for linearity in panel data models with interactive fixed effects. To construct the test statistic, we need to estimate the model under the null hypothesis of linearity and then obtain the restricted residuals. We show that after being appropriately centered and standardized, the test statistic is asymptotically normally distributed both under the null hypothesis and a sequence of Pitman local alternatives. To improve the finite sample performance, we propose a bootstrap procedure to obtain the bootstrap p-values. A small set of Monte Carlo simulations illustrates that our test performs well in finite samples. An application to an economic growth data indicates significant nonlinear relationships between economic growth, initial income level and capital accumulation.

Keywords

Common factors, Cross-sectional dependence, Economic Growth, Interactive fixed effects, Linearity, Panel data models, Specification test

Discipline

Econometrics | Economics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

186

Issue

1

First Page

222

Last Page

244

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2014.06.018

Publisher

Elsevier

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://dx.doi.org/10.1016/j.jeconom.2014.06.018

Included in

Econometrics Commons

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