Bias-Corrected Common Correlated Effects Pooled Estimation in Dynamic Panels

This article extends the common correlated effects pooled (CCEP) estimator to homogenous dynamic panels. In this setting, CCEP suffers from a large bias when the time span (T) of the dataset is fixed. We develop a bias-corrected CCEP estimator that is consistent as the number of cross-sectional units (N) tends to infinity, for T fixed or growing large, provided that the specification is augmented with a sufficient number of cross-sectional averages, and lags thereof. Monte Carlo experiments show that the correction offers strong improvements in terms of bias and variance. We apply our approach to estimate the dynamic impact of temperature shocks on aggregate output growth.

Automated summary

This article extends the common correlated effects pooled (CCEP) estimator to homogenous dynamic panels and develops a bias-corrected estimator that is consistent for a large number of cross-sectional units. Monte Carlo experiments demonstrate strong improvements in terms of bias and variance in the correction.