Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2014:12: A Factor Analytical Method to Interactive Effects Dynamic Panel Models with or without Unit Root

Joakim Westerlund () and Milda Norkute ()
Additional contact information
Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Milda Norkute: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: In a recent study, Bai (Fixed-Effects Dynamic Panel Models, A Factor Analytical Method. Econometrica 81, 285-314, 2013a) proposes a new factor analytic (FA) method to the estimation of dynamic panel data models, which has the unique and very useful property that it is completely bias-free. However, while certainly appealing, it is restricted to fixed effects models without a unit root. In many situations of practical relevance this is a rather restrictive consideration. The purpose of the current study is therefore to extend the FA approach to cover models with multiple interactive effects and a possible unit root.

Keywords: Interactive fixed effects; Dynamic panel data models; Unit root; Factor analytical method

JEL-codes: C12; C13; C33; C36

100 pages, April 14, 2014

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WP14_12.pdf PDF-file

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