Publication Type

Working Paper

Version

publishedVersion

Publication Date

8-2014

Abstract

In this paper, we propose a consistent nonparametric test for linearity in a large dimensional panel data model with interactive fixed effects. Both lagged dependent variables and conditional heteroskedasticity of unknown form are allowed in the model. We estimate the model under the null hypothesis of linearity to obtain the restricted residuals which are then used to construct the test statistic. We show that after being appropriately centered and standardized, the test statistic is asymptotically normally distributed under both the null hypothesis and a sequence of Pitman local alternatives by using the concept of conditional strong mixing that was recently introduced by Prakasa Rao (2009). To improve the finite sample performance, we propose a bootstrap procedure to obtain the bootstrap p-value. A small set of Monte Carlo simulations illustrates that our test performs well in finite samples. An application to an economic growth panel dataset indicates significant nonlinear relationships between economic growth, initial income level and capital accumulation.

Keywords

Common factors, Conditional strong mixing, Cross-sectional dependence, Economic growth, Interactive fixed effects, Linearity, Panel data models, Specification test, Economics

Discipline

Econometrics

Research Areas

Econometrics

First Page

1

Last Page

48

Publisher

SMU Economics and Statistics Working Paper Series, No. 08-2014

City or Country

Singapore

Copyright Owner and License

Authors

Comments

Published in Journal of Econometrics https://doi.org/10.1016/j.jeconom.2014.06.018

Included in

Econometrics Commons

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