Bias in Dynamic Panel Models under Time Series Misspecication

We consider within-group estimation of higher-order autoregressive panel models with exogenous regressors and …xed e¤ects, where the lag order is possibly misspeci…ed. Even when disregarding the misspeci…cation bias, the …xed-e¤ect bias formula is quite different from the correctly speci…ed case though its asymptotic order remain the same under the stationarity. We suggest some bias reduction methods under the possible misspeci…cation. Keywords: Bias, dynamic panel, …xed e¤ects, misspeci…cation, bias reduction. JEL Classi…cations: C23, C33 An earlier version of this paper is the part of my dissertation at Yale University and it was circulated as “A General Approach to Bias Correction in Dynamic Panels under Time Series Misspeci…cation.” I thank Peter Phillips, Donald Andrews, Yuichi Kitamura and seminar participants at Cornell, MSU, Texas A&M, SUNY-Binghamton, Yale, 2005 Inter University Conference at Princeton, 2007 Midwest Econometrics Group Meeting, and Conference in Honor of Peter C. B. Phillips. I also would like to thank an anonymous referee and coeditors for their detailed and constructive comments. All errors are solely mine. Address: Department of Economics, University of Michigan, 611 Tappan Street, Ann Arbor, MI 48109-1220. E-mail: [email protected].