Skip to main content Accessibility help


  • Michael Binder (a1), Cheng Hsiao (a2) and M. Hashem Pesaran (a3)

This paper considers estimation and inference in panel vector autoregressions where (i) the individual effects are either random or fixed, (ii) the time-series properties of the model variables are unknown a priori and may feature unit roots and cointegrating relations, and (iii) the time dimension of the panel is short and its cross-sectional dimension is large. Generalized method of moments (GMM) and quasi maximum likelihood (QML) estimators are obtained and compared in terms of their asymptotic and finite-sample properties. It is shown that the asymptotic variances of the GMM estimators that are based on levels in addition to first differences of the model variables depend on the variance of the individual effects, whereas by construction the fixed effects QML estimator is not subject to this problem. Monte Carlo evidence is provided showing that the fixed effects QML estimator tends to outperform the various GMM estimators in finite sample under both normal and nonnormal errors. The paper also shows how the fixed effects QML estimator can be successfully used for unit root and cointegration tests in short panels.We are grateful to Karim Abadir, Stephen Bond, Jinyong Hahn, Marc Nerlove, Ingmar Prucha, and, especially, Manuel Arellano, Peter Schmidt, Peter Phillips (the editor), and four anonymous referees for helpful and constructive comments. We have also benefited from useful suggestions by participants at various seminars and conferences.

Corresponding author
Address correspondence to Michael Binder, School of Business and Economics, Johann Wolfgang Goethe-University, Mertonstrasse 17, Box 79, 60054 Frankfurt am Main, Germany; e-mail: mbinder@
Hide All


Ahn, S.C. & P. Schmidt (1995) Efficient estimation of models for dynamic panel data. Journal of Econometrics 68, 527.
Ahn, S.C. & P. Schmidt (1997) Efficient estimation of dynamic panel data models: Alternative assumptions and simplified estimation. Journal of Econometrics 76, 309321.
Alonso-Borrego, C. & M. Arellano (1999) Symmetrically normalized instrumental variable estimation using panel data. Journal of Business & Economic Statistics 17, 3649.
Anderson, T.W. & C. Hsiao (1981) Estimation of dynamic models with error components. Journal of the American Statistical Association 76, 598606.
Anderson, T.W. & C. Hsiao (1982) Formulation and estimation of dynamic models using panel data. Journal of Econometrics 18, 4782.
Arellano, M. & S.R. Bond (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58, 277297.
Arellano, M. & O. Bover (1995) Another look at the instrumental variable estimation of error-components models. Journal of Econometrics 68, 2951.
Arellano, M. & B. Honoré (2001) Panel data models: Some recent developments. In J. Heckman & E. Leamer (eds.), Handbook of Econometrics, vol. 5, pp. 32293296. North-Holland.
Bai, J. & S. Ng (2004) A PANIC attack on unit roots and cointegration. Econometrica 70, 191221.
Baltagi, B.H. (2001) Econometric Analysis of Panel Data, 2nd ed. Wiley.
Baltagi, B.H. & C. Kao (2000) Nonstationary panels, cointegration in panels and dynamic panels: A survey. Advances in Econometrics 15, 751.
Bhargava, A. & J.D. Sargan (1983) Estimating dynamic random effects models from panel data covering short time periods. Econometrica 51, 16351659.
Binder, M., C. Hsiao, & M.H. Pesaran (2004) Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration. Mimeo, Goethe University Frankfurt, University of Southern California, and Cambridge University.
Binder, M. & M.H. Pesaran (2000) Solution of finite-horizon multivariate linear rational expectations models and sparse linear systems. Journal of Economic Dynamics and Control 24, 325346.
Blundell, R. & S.R. Bond (1998) Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115143.
Blundell, R. & R.J. Smith (1991) Initial conditions and efficient estimation in dynamic panel data models. Annales d'Economie et de Statistique 20/21, 109123.
Conley, T.G. (1999) GMM estimation with cross sectional dependence. Journal of Econometrics 92, 145.
Hahn, J. (1999) How informative is the initial condition in the dynamic panel data model with fixed effects? Journal of Econometrics 93, 309326.
Harris, R.D.F. & E. Tzavalis (1999) Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics 91, 201226.
Holtz-Eakin, D., W.K. Newey, & H.S. Rosen (1988) Estimating vector autoregressions with panel data. Econometrica 56, 13711395.
Hsiao, C., M.H. Pesaran, & A.K. Tahmiscioglu (1999) Bayes estimation of short-run coefficients in dynamic panel data models. In C. Hsiao, K. Lahiri, L.-F. Lee, & M.H. Pesaran (eds.), Analysis of Panels and Limited Dependent Variables, pp. 268296. Cambridge University Press.
Hsiao, C., M.H. Pesaran, & A.K. Tahmiscioglu (2002) Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods. Journal of Econometrics 109, 107150.
Hsiao, C., Y. Shen, & H. Fujiki (forthcoming) Aggregate vs. disaggregate data analysis—A paradox in the estimation of money demand function under the low interest rate policy. Journal of Applied Econometrics.
Im, K., M.H. Pesaran, & Y. Shin (2003) Testing for unit roots in heterogeneous panels. Journal of Econometrics 115, 5374.
Kiviet, J.F. (1995) On bias, inconsistency, and efficiency of various estimators in dynamic panel data models. Journal of Econometrics 68, 5378.
Lee, K., M.H. Pesaran, & R. Smith (1997) Growth and convergence in a multi-country empirical stochastic solow model. Journal of Applied Econometrics 12, 357392.
Levin, A., F. Lin, & C. Chu (2002) Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics 108, 124.
Maddala, G.S. & S. Wu (1999) A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics 61, 631652.
Moon, H.R. & B. Perron (2004) Testing for a unit root in panels with dynamic factors. Journal of Econometrics 122, 81126.
Nerlove, M. (1999) Likelihood inference for dynamic panel data models. Annales d'Economie et de Statistique 55/56, 370410.
Neyman, J. & E. Scott (1948) Consistent estimates based on partially consistent observations. Econometrica 16, 132.
Nickell, S. (1981) Biases in dynamic models with fixed effects. Econometrica 49, 13991416.
Pesaran, M.H. (2003) A Simple Panel Unit Root Test in the Presence of Cross Section Dependence. Cambridge Working papers in economics 0346.
Pesaran, M.H. (2004) Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure. CESifo Working paper series 1331.
Pesaran, M.H. & Y. Shin (2002) Long-run structural modelling. Econometric Reviews 21, 4987.
Pesaran, M.H., Y. Shin, & R.J. Smith (2000) Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics 97, 293343.
Phillips, P.C.B. (1989) Partially identified econometric models. Econometric Theory 5, 181240.
Phillips, P.C.B. (1991) Optimal inference in cointegrated systems. Econometrica 59, 283306.
Phillips, P.C.B. & H.R. Moon (2000) Nonstationary panel data analysis: An overview of some recent developments. Econometric Reviews 19, 263286.
Phillips, P.C.B. & D. Sul (2003) Dynamic panel estimation and homogeneity testing under cross section dependence. Econometrics Journal 6, 217259.
Wansbeek, T. & P. Bekker (1996) On IV, GMM and ML in a dynamic panel data model. Economics Letters 51, 145152.
White, H. (1994) Estimation, Inference and Specification Analysis. Cambridge University Press.
Ziliak, J.P. (1997) Efficient estimation with panel data when instruments are predetermined: An empirical comparison of moment-condition estimators. Journal of Business & Economic Statistics 15, 419431.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Econometric Theory
  • ISSN: 0266-4666
  • EISSN: 1469-4360
  • URL: /core/journals/econometric-theory
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed