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Baltagi article on heterogeneous panels with structural breaks published in Journal of Econometrics

Feb 29, 2016

Estimation of Heterogeneous Panels with Structural Breaks

Badi H. Baltagi, Qu Feng & Chihwa Kao

Journal of Econometrics, February 2016

Badi H. Baltagi

Badi H. Baltagi

This paper extends Pesaran’s (2006) work on common correlated effects (CCE) estimators for large heterogeneous panels with a general multifactor error structure by allowing for unknown common structural breaks. Structural breaks due to new policy implementation or major technological shocks, are more likely to occur over a longer time span. Consequently, ignoring structural breaks may lead to inconsistent estimation and invalid inference. The authors propose a general framework that includes heterogeneous panel data models and structural break models as special cases. The least squares method proposed by Bai (1997a, 2010) is applied to estimate the common change points, and the consistency of the estimated change points is established. They find that the CCE estimator have the same asymptotic distribution as if the true change points were known. Additionally, Monte Carlo simulations are used to verify the main results of this paper.