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First difference estimation of spatial dynamic panel data models with fixed effects

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  • Jin, Fei
  • Lee, Lung-fei
  • Yu, Jihai

Abstract

This paper investigates the first difference (FD) estimation of spatial dynamic panel data (SDPD) models with fixed effects using quasi-maximum likelihood (QML) approach, where both n and T are large. We show that the QML estimation for the SDPD with FD can be reduced to the direct estimation of individual effects, except for the estimation of variance parameter. After bias correction, these two approaches would yield asymptotically equivalent estimates for all parameters including the variance parameter. Our results extend the equivalence of LSDV estimate and GLS estimate of FD equation in the panel regression model to the spatial dynamic panel model, which includes the conventional dynamic panel as a special case. Our analysis highlights the importance of initial values rather than the many fixed effects in spatial panel models.

Suggested Citation

  • Jin, Fei & Lee, Lung-fei & Yu, Jihai, 2020. "First difference estimation of spatial dynamic panel data models with fixed effects," Economics Letters, Elsevier, vol. 189(C).
    • Handle: RePEc:eee:ecolet:v:189:y:2020:i:c:s0165176520300392
    DOI: 10.1016/j.econlet.2020.109010
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    References listed on IDEAS

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    1. Hsiao, Cheng & Hashem Pesaran, M. & Kamil Tahmiscioglu, A., 2002. "Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods," Journal of Econometrics, Elsevier, vol. 109(1), pages 107-150, July.
    2. Yu, Jihai & de Jong, Robert & Lee, Lung-fei, 2008. "Quasi-maximum likelihood estimators for spatial dynamic panel data with fixed effects when both n and T are large," Journal of Econometrics, Elsevier, vol. 146(1), pages 118-134, September.
    3. Yu, Jihai & de Jong, Robert & Lee, Lung-fei, 2012. "Estimation for spatial dynamic panel data with fixed effects: The case of spatial cointegration," Journal of Econometrics, Elsevier, vol. 167(1), pages 16-37.
    4. Yu, Jihai & Lee, Lung-fei, 2010. "Estimation Of Unit Root Spatial Dynamic Panel Data Models," Econometric Theory, Cambridge University Press, vol. 26(5), pages 1332-1362, October.
    5. Su, Liangjun & Yang, Zhenlin, 2015. "QML estimation of dynamic panel data models with spatial errors," Journal of Econometrics, Elsevier, vol. 185(1), pages 230-258.
    6. Jinyong Hahn & Guido Kuersteiner, 2002. "Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects when Both "n" and "T" Are Large," Econometrica, Econometric Society, vol. 70(4), pages 1639-1657, July.
    7. Kapoor, Mudit & Kelejian, Harry H. & Prucha, Ingmar R., 2007. "Panel data models with spatially correlated error components," Journal of Econometrics, Elsevier, vol. 140(1), pages 97-130, September.
    8. Lung-fei Lee & Jihai Yu, 2012. "QML Estimation of Spatial Dynamic Panel Data Models with Time Varying Spatial Weights Matrices," Spatial Economic Analysis, Taylor & Francis Journals, vol. 7(1), pages 31-74, March.
    9. Baltagi, Badi H. & Heun Song, Seuck & Cheol Jung, Byoung & Koh, Won, 2007. "Testing for serial correlation, spatial autocorrelation and random effects using panel data," Journal of Econometrics, Elsevier, vol. 140(1), pages 5-51, September.
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    11. Yang, Zhenlin, 2018. "Unified M-estimation of fixed-effects spatial dynamic models with short panels," Journal of Econometrics, Elsevier, vol. 205(2), pages 423-447.
    12. Lee, Lung-fei & Yu, Jihai, 2010. "A Spatial Dynamic Panel Data Model With Both Time And Individual Fixed Effects," Econometric Theory, Cambridge University Press, vol. 26(2), pages 564-597, April.
    13. Korniotis, George M., 2010. "Estimating Panel Models With Internal and External Habit Formation," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(1), pages 145-158.
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    2. Mengqi Zhang & Boping Tian, 2023. "Estimation of the Non-Parametric Spatial Dynamic Panel Data Model with Fixed Effects," Mathematics, MDPI, vol. 11(13), pages 1-23, June.

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    More about this item

    Keywords

    Spatial autoregression; Dynamic panels; Fixed effects; First difference; Quasi-maximum likelihood estimation; Bias correction;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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