Baltagi article on endogenous regressors in large heterogeneous panels published in JAE
May 1, 2019
Badi H. Baltagi, Qu Feng & Chihwa Kao
Journal of Applied Econometrics, May 2019
Badi H. Baltagi
This paper extends Pesaran's (Econometrica, 2006, 74, 967–1012) common correlated effects (CCE) by allowing for endogenous regressors in large heterogeneous panels with unknown common structural changes in slopes and error factor structure. Since endogenous regressors and structural breaks are often encountered in empirical studies with large panels, this extension makes Pesaran's CCE approach empirically more appealing. In addition to allowing for slope heterogeneity and cross-sectional dependence, the authors find that Pesaran's CCE approach is also valid when dealing with unobservable factors in the presence of endogenous regressors and structural changes in slopes and error factor loadings. This is supported by Monte Carlo experiments.