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.
Common factors, Cross-sectional dependence, Economic Growth, Interactive fixed effects, Linearity, Panel data models, Specification test
Econometrics | Economics
Journal of Econometrics
SU, Liangjun; JIN, Sainan; and ZHANG, Yonghui.
Specification Test for Panel Data Models with Interactive Fixed Effects. (2015). Journal of Econometrics. 186, (1), 222-244. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1499
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