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
Citation
SU, Liangjun; JIN, Sainan; and ZHANG, Yonghui.
Specification Test for Panel Data Models with Interactive Fixed Effects. (2014). 1-48.
Available at: https://ink.library.smu.edu.sg/soe_research/1593
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
Published in Journal of Econometrics https://doi.org/10.1016/j.jeconom.2014.06.018