Specification Test for Panel Data Models with Interactive Fixed Effects

83 Pages Posted: 30 Jun 2014

See all articles by Liangjun Su

Liangjun Su

Tsinghua University

Sainan Jin

Singapore Management University

Yonghui Zhang

Renmin University of China

Date Written: June 1, 2014

Abstract

In this paper, we propose a consistent nonparametric test for linearity in a large dimensional panel data model with interactive fixed effects. Both lagged dependent variables and conditional heteroskedasticity of unknown form are allowed in the model. We estimate the model under the null hypothesis of linearity to obtain the restricted residuals which are then used to construct the test statistic. We show that after being appropriately centered and standardized, the test statistic is asymptotically normally distributed under both the null hypothesis and a sequence of Pitman local alternatives by using the concept of conditional strong mixing that was recently introduced by Prakasa Rao (2009). To improve the finite sample performance, we propose a bootstrap procedure to obtain the bootstrap p-value. A small set of Monte Carlo simulations illustrates that our test performs well in finite samples. An application to an economic growth panel dataset indicates significant nonlinear relationships between economic growth, initial income level and capital accumulation.

Keywords: Common factors; Conditional strong mixing; Cross-sectional dependence; Economic Growth; Interactive fixed effects; Linearity; Panel data models; Specification test

JEL Classification: C12, C14, C23

Suggested Citation

Su, Liangjun and Jin, Sainan and Zhang, Yonghui, Specification Test for Panel Data Models with Interactive Fixed Effects (June 1, 2014). Available at SSRN: https://ssrn.com/abstract=2460200 or http://dx.doi.org/10.2139/ssrn.2460200

Liangjun Su (Contact Author)

Tsinghua University ( email )

B606 Lihua Building
School of Economics and Management
Beijing, Beijing 100084
China

Sainan Jin

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Yonghui Zhang

Renmin University of China ( email )

School of Economics
No. 59 Zhongguancun Street
Beijing, Beijing 100872
China

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