Testing for Individual Effects in Dynamic Models Using Panel Data

This note presents a simple, linear test for individual effects in dynamic models using panel data; building upon the techniques of Holtz-Eakin, Newey, and Rosen (HNR) [198S] for estimating vector autoregressions using panel data. While implementing estimators which are consistent in the presence of individual effects is straightforward, there is no guarantee that this form of heterogeneity is an -important feature of the data. Moreover, there are advantages to avoiding an individual v effects specification. Thus, it is useful to have a test for the existence of individual effects. The test focuses on sample moment conditions implied by the presence of individual effects and is particularly suited for dynamic models using panel data. The calculations follow directly from linear, instrumental variable techniques which are computationally straightforward. Moreover, the test statistics follows directly from the estimation of autoregressive models.