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help xtmg
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Title
xtmg -- Estimating panel time series models with heterogeneous slopes
Syntax
xtmg varlist [if] [in] [, trend robust cce aug imp full level(num)
res(string)]
Description
xtmg implements a number of panel time series estimators which allow for
heterogeneous slope coefficients across group members and are also
concerned with correlation across panel members (cross-section
dependence): the Pesaran and Smith (1995) Mean Group estimator, the
Pesaran (2006) Common Correlated Effects Mean Group estimator and the
Augmented Mean Group estimator, introduced in Eberhardt and Teal (2010)
and Bond and Eberhardt (2009).
(i) Background
These various estimators are designed for 'moderate-T, moderate-N' macro
panels, where moderate typically means from around 15
time-series/cross-section observations --- from a micro panel perspective
this is 'large-T, small-N' and from a time-series perspective 'small-T'
and the analysis of this type of data is frequently dominated by
estimators developed for micro datasets (see for instance the discussion
in Roodman, 2009). Examples for this type of data include the Penn World
Table and macro panel data from organisations such as the World Bank,
FAO, IMF, OECD, etc, all of which provide time-series of frequently up to
60 years across a significant number of developing and developed
economies. For links to these and other datasets refer to this website.
The estimators implemented here form part of the panel time series (aka
nonstationary panel) literature, which emphasises variable
nonstationarity, cross-section dependence as well as parameter
heterogeneity (in the slope parameters, not just time-invariant effects).
For discussion and illustration of the application of panel time series
methods see Eberhardt and Teal (2010, 2011) and Moscone and Tosetti
(2010).
(ii) Empirical Model
Assume the following simple model: for i=1,...,N ('group', typically
countries or regions) and t=1,...,T (time, typically years) let
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(1) y_it = x_it'*b_i + u_it
(2) x_it = a2_i + lambda_i*f_t + gamma_i*g_t + eps_it
(3) u_it = a1_i + lambda_i*f_t + e_it
where x_it and y_it are observables, b_i are country-specific slopes on
the observable regressors and u_it contains the unobservables and the
error terms e_it. The unobservables in equation (3) are made up of
standard group fixed effects a1_i, which capture time-invariant
heterogeneity across groups, as well as an unobserved common factor f_t
with heterogeneous factor loadings lambda_i, which can capture
time-variant heterogeneity and cross-section dependence. Note that the
factors (f_t and similarly g_t) are not limited to linear evolution over
time, but can be non-linear and also nonstationary, with obvious
implications for cointegration. For simplicity the model only includes
one covariate and one unobserved common factor in the estimation equation
of interest (1). Additional problems arise if the regressors are driven
by some of the same common factors as the observables: note the presence
of f_t in equations (2) and (3), see discussion in Coakley, Fuertes and
Smith (2006). eps_it and e_it are assumed white noise.
(iii) Empirical Implementation
All Mean Group type estimators follow the same principle methodology:
(a) estimate a group-specific regression,
(b) average the estimated coefficients across groups.
The following describes the estimators implemented in this routine in
some more detail.
The Pesaran and Smith (1995) Mean Group estimator (MG) does not concern
itself with cross-section dependence and assumes away lambda_i*f_t or
models these unobservables with a linear trend. Thus equation (1) above
is estimated for each panel member i, including an intercept to capture
fixed effects and optionally a linear trend to capture time-variant
unobservables. The coefficients b_i are subsequently averaged across
panel members -- here weights can be applied but in the standard
implementation this is just the unweighted average. Note that the
Blackburne and Frank (xtpmg if installed) command as well as a recent
version of Persyn's (xtwest if installed) command optionally provide MG
estimates for dynamic specifications.
The Pesaran (2006) Common Correlated Effects Mean Group estimator (CCEMG)
allows for the empirical setup as laid out in equations (1) to (3), which
induces cross-section dependence, time-variant unobservables with
heterogeneous impact across panel members and problems of identification
(b_i is unidentified if the regressor contains f_t). The latter issue is
comparable to the transmission bias problem in micro production function
models, whereby inputs x_it are correlated with (from the
econometrician's perspective) unobserved productivity shocks f_t. The
CCEMG solves this problem with a simple but powerful augmentation of the
group-specific regression equation: apart from the regressors x_it and an
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intercept this equation now includes the cross-section/panel averages
(for the entire panel i=1,...,N) of the dependent and independent
variables: ybar_t and xbar_t. Together these can account for the
unobserved common factor f_t and given the group-specific estimation the
heterogeneous impact (lambda_i) is also given. The coefficients b_i are
again averaged across panel members, where different weights may be
applied.
In empirical application the estimated coefficients on the cross-section
averaged variables as well as their average estimates are not
interpretable in a meaningful way: they are merely present to blend out
the biasing impact of the unobservable common factor. The focus of the
estimator is on obtaining consistent estimates of the parameters related
to the observable variables. The CCEMG approach is robust to the presence
of a limited number of 'strong' factors as well as an infinite number of
'weak' factors -- the latter can be associated with local spillover
effects, whereas the former represent global shocks (see Pesaran and
Tosetti (2010) for further details). Furthermore, as shown by Kapetanios,
Pesaran and Yamagata (2011), these factors may be nonstationary.
The Augmented Mean Group estimator (AMG) was developed in Eberhardt and
Teal (2010) as an alternative to the Pesaran (2006) CCEMG with production
function estimation in mind. In the CCEMG the set of unobservable common
factors is treated as a nuisance, something to be accounted for which is
not of particular interest for the empirical analysis. In cross-country
production functions, however, unobservables represent Total Factor
Productivity (TFP). Note that standard panel approaches to cross-country
empirics are commonly based on a production function of Cobb-Douglas
form, see Eberhardt and Teal (2011) for a detailed discussion of the
growth empirics literature.
The AMG procedure, which is further discussed and tested using Monte
Carlo simulations in Bond and Eberhardt (2009), is implemented in three
steps: (i) A pooled regression model augmented with year dummies is
estimated by first difference OLS and the coefficients on the
(differenced) year dummies are collected. They represent an estimated
cross-group average of the evolution of unobservable TFP over time. This
is referred to as 'common dynamic process'. (ii) The group-specific
regression model is then augmented with this estimated TFP process:
either (a) as an explicit variable, or (b) imposed on each group member
with unit coefficient by subtracting the estimated process from the
dependent variable. Like in the MG case the regression model includes an
intercept, which captures time-invariant fixed effects (TFP level). (iii)
Like in the MG and CCEMG the group-specific model parameters are averaged
across the panel. In simulations the AMG performed similarly well as the
CCEMG in terms of bias or RMSE in panels with nonstationary variables
(cointegrated or not) and multifactor error terms (cross-section
dependence).
Note that the standard errors reported in the averaged regression results
(i.e. the standard output) are constructed following Pesaran and Smith
(1995), thus testing the significant difference of the average
coefficient from zero. In practice the group-specific coefficients are
regressed on an intercept, either without any weighting or attaching less
weight to 'outliers' (see rreg for more details on the latter.
Options
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cce implements the Pesaran (2006) CCE Mean Group estimator (default:
Pesaran and Smith (1995) Mean Group estimator). The output includes the
averaged coefficients on the cross-section averages of the dependent and
independent variables. These are identified by the suffix _varname.
aug implements the Augmented MG estimator.
imp specifies that the Augmented MG estimator is implemented by imposing
the 'common dynamic process' with unit coefficient (by subtracting it
from the dependent variable). This option only works in combination with
aug.
trend specifies a group-specific linear trend to be included in the
regression model.
robust estimates the outlier-robust mean of parameter coefficients across
groups. This is implemented via the Stata command rreg for robust
regression. An example of this practice can be found in Bond,
Leblebicioglu and Schiantarelli (2010). This option is not to be
confused with the standard option calling for White
heteroskedasticity-robust standard errors in the reg and xtreg commands.
full provides the underlying group-specific regression results. These can
also be accessed using the matrices stored as part of the the xtmg
command: the group-specific coefficients in e(betas), related
t-statistics in e(tbetas).
level(num) specifies the confidence level for confidence intervals,
allowing for values between 10 and 99.99 inclusive. If option trend is
used the routine will compute the number and share of group-specific
trends in the sample which are significant at the (100-num) significance
level.
res(string) provides residuals which are stored in string. These can then
be subjected to diagnostic tests, including for cross-section dependence
(see xtcd if installed). Note that these residual series are not based on
the linear prediction of the averaged MG estimates but are derived from
the group-specific regressions. This is similar to the post-estimation
command predict with the option group(varname) in the Random Coefficient
Model estimator xtrc, although in the latter this only allows for
predicted values with residuals not directly obtainable.
Return values
Scalars
e(N) Number of observations used in the estimation
e(N_g) Number of groups
e(g_min) Lowest number of observations in an included group
e(g_max) Highest number of observations in an included group
e(g_avg) Average number of observations per included group
e(df_m) Model degrees of freedom
e(chi2) Wald chi-squared statistic
e(sig2) Estimated variance of the model residuals
e(trend_sig) Share of group-specific linear trends statistically s
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> ignificant
(significance level determined by choice of level(
> ))
Macros
e(cmd) Name of Stata command: "xtmg"
e(ivar) Group (panel) variable
e(tvar) Time variable
e(title2) Estimator selected: MG, AMG or CCEMG
e(depvar) Dependent variable
Matrices
e(b) Vector of averaged coefficients
e(V) Variance-covariance matrix
e(betas) Matrix of group-specific regression coefficients, pri
> nted with
the full option
e(varbetas) Matrix of variances associated with group-specific re
> gression
coefficients
e(stebetas) Matrix of standard errors associated with group-speci
> fic
regression coefficients, printed with the full opt
> ion
e(tbetas) Matrix of t-statistics associated with group-specific
> regression
coefficients, printed with the full option
Functions
e(sample) Marks estimation sample
Example
Download manufacturing data (zipped file) for 48 countries from 1970 to 2002
(unbalanced panel), see Eberhardt and Teal (2010) for more details on data
construction and deflation, and open the manu.dta file in Stata.
Variables used here: ly - log value-added per worker, lk - log capital stock
per worker (for the manufacturing sector respectively). The following
examples estimate cross-country production functions of the Cobb-Douglas form
with CRS imposed. Results can be compared with those in the above mentioned
paper (except for the -robust- option).
Set panel dimensions: time variable - year, country identifier - list
.tsset list year
Production function model estimated using the standard MG estimator
.xtmg ly lk
Dto with country-specific linear trend
.xtmg ly lk, trend
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Dto but computing outlier-robust (instead of unweighted) means
.xtmg ly lk, trend robust
Production function model estimated using the CCEMG estimator
.xtmg ly lk, cce
Dto but also printing country-specific results
.xtmg ly lk, cce full
Dto but storing country-specific regression residuals in variable cce_res
.xtmg ly lk, cce res(cce_res)
Production function model estimated using the AMG estimator (group-specific
trend-terms included)
.xtmg ly lk, trend aug
Dto but imposed the 'common dynamic process' with unit coefficient
.xtmg ly lk, trend aug imp
References
Bond, Steve, Asli Leblebicioglu and Fabio Schiantarelli (2010) 'Capital
accumulation and growth: a new look at the empirical evidence,' Journal
of Applied Econometrics, Vol. 25(7), pp.1073-1099.
Bond, Steve and Markus Eberhardt (2009) 'Cross-section dependence in
nonstationary panel models: a novel estimator', paper presented at the
Nordic Econometrics Conference in Lund, available from here.
Coakley, Jerry, Ana-Maria Fuertes and Ron P. Smith (2006) 'Unobserved
heterogeneity in panel time series models', Computational Statistics &
Data Analysis, Vol.50(9), pp.2361-2380.
Eberhardt, Markus and Francis Teal (2011) 'Econometrics for Grumblers: A New
Look at the Literature on Cross-Country Growth Empirics', Journal of
Economic Surveys, Vol.25(1), pp.109–155, available from here.
Eberhardt, Markus and Francis Teal (2010) 'Productivity Analysis in Global
Manufacturing Production', Economics Series Working Papers 515,
University of Oxford, Department of Economics, available from here.
Kapetanios, George, M. Hashem Pesaran and Takashi Yamagata (2011) Panels with
non-stationary multifactor error structures, Journal of Econometrics,
Vol.160(2), pp.326-348.
Moscone, Francesco and Elisa Tosetti (2009) 'Health Expenditure and Income in
the United States', Health Economics, Vol.19(12), pp.1385-1403.
Pesaran, M. Hashem (2006) 'Estimation and inference in large heterogeneous
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panels with a multifactor error structure.' Econometrica, Vol. 74(4):
pp.967-1012.
Pesaran, M Hashem, Yongcheol Shin and Ron Smith (1999) 'Pooled mean group
estimation of dynamic heterogeneous panels', Journal of the American
Statistical Association, Vol.94 pp.621-634.
Pesaran, M. Hashem and Ron P. Smith (1995). 'Estimating long-run
relationships from dynamic heterogeneous panels.' Journal of
Econometrics, Vol. 68(1): pp.79-113.
Pesaran, M. Hashem and Elisa Tosetti (2010) 'Large Panels with Common Factors
and Spatial Correlations', Cambridge University, unpublished working
paper, December 2010.
Roodman, David (2009) 'A Note on the Theme of Too Many Instruments', Oxford
Bulletin of Economics and Statistics, Department of Economics, Vol.
71(1), pp.135-158.
Acknowledgements and Disclaimer
This routine builds to a considerable extent on the existing code for the
Swamy RCM estimator (xtrc), the Pesaran, Shin and Smith (1999) Pooled Mean
Group estimator written by Edward F. Blackburne and Mark W. Frank (xtpmg if
installed) and the Westerlund (2007) error correction cointegration test (
xtwest if installed) written by Damiaan Persyn. Thanks to Kit Baum for help
and support. Any errors are of course my own.
Author
Markus Eberhardt
Centre for the Study of African Economies
Department of Economics
University of Oxford
Manor Road, Oxford OX1 3UQ
[email protected]
Also see
Online: help for xtrc, xtpmg (if installed), xtwest (if installed), xtcsd (if
installed), xtcd (if installed).
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