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Estimating dynamic panel models: backing out the Nickell Bias

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  • Jerry Hausman
  • Maxim L. Pinkovskiy

Abstract

We propose a new estimator for the dynamic panel model, which solves the failure of strict exogeneity by calculating the bias in the first-order conditions as a function of the autoregressive parameter and solving the resulting equation. The estimator does well in a wide variety of situations where other estimators do not perform well: stationary initial condition, predetermined but not strictly exogenous regressors, and the presence of correlation between the error terms and the fixed effects. We also propose a general method for including predetermined variables infixed-effects panel regressions.

Suggested Citation

  • Jerry Hausman & Maxim L. Pinkovskiy, 2017. "Estimating dynamic panel models: backing out the Nickell Bias," CeMMAP working papers 53/17, Institute for Fiscal Studies.
    • Handle: RePEc:azt:cemmap:53/17
    DOI: 10.1920/wp.cem.2017.5317
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    References listed on IDEAS

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    1. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
    2. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    3. Jushan Bai, 2013. "Fixed‐Effects Dynamic Panel Models, a Factor Analytical Method," Econometrica, Econometric Society, vol. 81(1), pages 285-314, January.
    4. 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.
    5. Hahn, Jinyong, 1999. "How informative is the initial condition in the dynamic panel model with fixed effects?," Journal of Econometrics, Elsevier, vol. 93(2), pages 309-326, December.
    6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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