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TESTING HOMOGENEITY IN PANEL DATA MODELS WITH INTERACTIVE FIXED EFFECTS

Published online by Cambridge University Press:  07 August 2013

Liangjun Su  and
Qihui Chen
Liangjun Su
Affiliation:
Singapore Management University
Qihui Chen
Affiliation:
University of California, San Diego
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Abstract

This paper proposes a residual-based Lagrange Multiplier (LM) test for slope homogeneity in large-dimensional panel data models with interactive fixed effects. We first run the panel regression under the null to obtain the restricted residuals and then use them to construct our LM test statistic. We show that after being appropriately centered and scaled, our test statistic is asymptotically normally distributed under the null and a sequence of Pitman local alternatives. The asymptotic distributional theories are established under fairly general conditions that allow for both lagged dependent variables and conditional heteroskedasticity of unknown form by relying on the concept of conditional strong mixing. To improve the finite-sample performance of the test, we also propose a bootstrap procedure to obtain the bootstrap p-values and justify its validity. Monte Carlo simulations suggest that the test has correct size and satisfactory power. We apply our test to study the Organization for Economic Cooperation and Development economic growth model.

Type
ARTICLES
Information
Econometric Theory , Volume 29 , Issue 6 , December 2013 , pp. 1079 - 1135
Copyright
Copyright © Cambridge University Press 2013 

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Footnotes

1

The authors gratefully thank the co-editor, Guido Kuersteiner, and three anonymous referees for their many constructive comments on the previous version of the paper. They also express their sincere appreciation to Hashem Pesaran for discussions on the subject matter. They sincerely thank the participants at the 2011 Tsinghua International Conference in Econometrics and the seminar at the University of Adelaide who provided valuable suggestions and discussion. The first author gratefully acknowledges the Singapore Ministry of Education for Academic Research Fund under grant number MOE2012-T2-2-021. correspondence to Liangjun Su, School of Economics, Singapore Management University, 90 Stamford Road, Singapore, 178903; e-mail: [email protected].

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