Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 04/2015: Persistence, Signal-Noise Pattern and Heterogeneity in Panel Data: With an Application to the Impact of Foreign Direct Investment on GDP

Erik Biørn () and Xuehui Han ()
Additional contact information
Erik Biørn: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Xuehui Han: Economics and Research Department, Postal: Asian Development Bank,, 6 ADB Avenue Mandaluyong City 1550, Metro Manila, Philippines

Abstract: GMM estimation of autoregressive panel data equations in error-ridden variables when the noise has memory, is considered. The impact of variation in the memory length in signal and noise spread and in the degree of individual heterogeneity are discussed with respect to finite sample bias, using Monte Carlo simulations. Also explored are also the impact of the strength of autocorrelation and the size of the IV set. GMM procedures using IVs in differences on equations in levels, in general perform better in small samples than procedures using IVs in levels on equations in differences. A case-study of the impact of Foreign Direct Investment (FDI) on GDP, inter alia, contrasting the manufacturing and the service sector, based on country panel data supplements the simulation results.

Keywords: Panel data; Measurement error; ARMA; GMM; Error memory; Monte Carlo; Foreign Direct Investment; Economic development; Country panel

JEL-codes: C21; C23; C31; C33; O11; O14

22 pages, February 12, 2015

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