Journal
JOURNAL OF ECONOMETRICS
Volume 142, Issue 1, Pages 50-93Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2007.05.010
Keywords
tests of slope homogeneity; dispersion tests; large panels; Monte Carlo results
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This paper proposes a standardized version of Swamy's test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T). The proposed test, denoted by Delta, exploits the cross section dispersion of individual slopes weighted by their relative precision. In the case of models with strictly exogenous regressors, but with non-normally distributed errors, the test is shown to have a standard normal distribution as (N, T) ->(j)infinity such that root N/T-2 -> 0. When the errors are normally distributed, a mean-variance bias adjusted version of the test is shown to be normally distributed irrespective of the relative expansion rates of N and T. The test is also applied to stationary dynamic models, and shown to be valid asymptotically so long as (N, T) ->kappa, as (N,T) ->(j) infinity, where 0 <= kappa <= infinity. Using Monte Carlo experiments, it is shown that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T. Similar results are also obtained for dynamic panels, but only if the autoregressive coefficient is not too close to unity and so long as T >= N. (C) 2007 Elsevier B.V. All rights reserved.
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