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On the two algorithms for estimating interactive fixed effects models in Bai (2009)

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  • Chen, Qiang
  • Yan, Guanpeng

Abstract

In an influential paper, Bai (2009) estimates the interactive fixed effects models by iterating between OLS and PCA until convergence. Bai (2009) proposes two algorithms, one for deriving the limiting theory, while the other for implementation. But the relation between these two algorithms has not been adequately addressed in the literature. We show that the nonlinear simultaneous equations characterizing these two algorithms have the same solutions, but the convergent paths are different in general. We conduct Monte Carlo simulations to compare the statistical and convergent properties of these two algorithms, and find patterns different from previous beliefs.

Suggested Citation

  • Chen, Qiang & Yan, Guanpeng, 2023. "On the two algorithms for estimating interactive fixed effects models in Bai (2009)," Economics Letters, Elsevier, vol. 233(C).
    • Handle: RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523004214
    DOI: 10.1016/j.econlet.2023.111395
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    References listed on IDEAS

    as
    1. Jiang, Bin & Yang, Yanrong & Gao, Jiti & Hsiao, Cheng, 2021. "Recursive estimation in large panel data models: Theory and practice," Journal of Econometrics, Elsevier, vol. 224(2), pages 439-465.
    2. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, July.
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    More about this item

    Keywords

    Interactive fixed effects; Least squares; Principal components;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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