"POOLED MEAN GROUP ESTIMATION OF DYNAMIC HETEROGENEOUS PANELS"M Hashem Pesaran, Yongcheol Shin and Ron Smith. Journal of the American Statistical Association, 1999, Vol 94 pp.621-634.
Abstract: It is now quite common to have panels in which both T, the number of time series observations, and N, the number of groups, are quite large and of the same order of magnitude. The usual practice is either to estimate N separate regressions and calculate the coefficient means, which we call the Mean Group (MG) estimator, or to pool the data and assume that the slope coefficients and error variances are identical. In this paper, we propose an intermediate procedure, referred to as the Pooled Mean Group (PMG) estimator, which constrains the long run coefficients to be identical, but allows the short run coefficients and error variances to differ across groups. We consider both the case where the regressors are stationary and the case where they follow unit root processes, and for both cases derive the asymptotic distribution of the PMG estimators as T tends to infinity. We also provide two empirical applications: aggregate consumption functions for 24 OECD economies over the period 1962-93, and energy demand functions for 10 Asian developing economies over the period 1974-90.
JEL-Classification: C13 C23, C63, E21.
Keywords: Heterogeneous dynamic panels, pooled mean group estimator, I(0) and I(1) regressors, consumption functions, energy demand.
Web Link: http://www.amstat.org/publications/jasa/index.cfm?fuseaction=toc_99
Program and Data: http://www.econ.cam.ac.uk/faculty/pesaran/jasa.exe
Full text (previous version): http://www.econ.cam.ac.uk/faculty/pesaran.jasaold.pdf