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Keywords:

  • Autoregression;
  • Bias;
  • Cross section dependence ;
  • Dynamic factors;
  • Dynamic panel estimation;
  • GLS estimation;
  • Homogeneity tests;
  • Median unbiased estimation;
  • Modified Hausman tests;
  • Median unbiased SUR estimation;
  • Orthogonalization procedure;
  • Panel unit root test

Summary. This paper deals with cross section dependence, homogeneity restrictions and small sample bias issues in dynamic panel regressions. To address the bias problem we develop a panel approach to median unbiased estimation that takes account of cross section dependence. The estimators given here considerably reduce the effects of bias and gain precision from estimating cross section error correlation. This paper also develops an asymptotic theory for tests of coefficient homogeneity under cross section dependence, and proposes a modified Hausman test to test for the presence of homogeneous unit roots. An orthogonalization procedure, based on iterated method of moments estimation, is developed to remove cross section dependence and permit the use of conventional and meta unit root tests with panel data. Some simulations investigating the finite sample performance of the estimation and test procedures are reported.