Specification test for panel data models with interactive fixed effects

• Main Authors: SU, Liangjun, JIN, Sainan, ZHANG, Yonghui
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Common factors; Cross-sectional dependence; Economic Growth; Interactive fixed effects; Linearity; Panel data models; Specification test; Econometrics; Economics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1499; https://ink.library.smu.edu.sg/context/soe_research/article/2498/viewcontent/SpecificationTestPanelDataModelsInteractiveFixedEff_2012.pdf
• Institution: Singapore Management University

In this paper, we propose a consistent nonparametric test for linearity in panel data models with interactive fixed effects. To construct the test statistic, we need to estimate the model under the null hypothesis of linearity and then obtain the restricted residuals. We show that after being appropriately centered and standardized, the test statistic is asymptotically normally distributed both under the null hypothesis and a sequence of Pitman local alternatives. To improve the finite sample performance, we propose a bootstrap procedure to obtain the bootstrap p-values. A small set of Monte Carlo simulations illustrates that our test performs well in finite samples. An application to an economic growth data indicates significant nonlinear relationships between economic growth, initial income level and capital accumulation.