Estimating Latent Group Structure in Time-Varying Coefficient Panel Data Models

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JournalEconometrics Journal
DateAccepted/In press - 14 Mar 2019
DateE-pub ahead of print (current) - 1 Aug 2019
Number of pages18
Early online date1/08/19
Original languageEnglish

Abstract

This paper studies the estimation of latent group structures in heterogeneous time-varying coefficient panel data models. While allowing the coefficient functions to vary over cross sections provides a good way to model cross-sectional heterogeneity, it reduces the degree of freedom and leads to poor estimation accuracy when the time-series length is short. On the other hand, in a lot of empirical studies, it is not uncommon to find that heterogeneous coefficients exhibit group structures where coefficients belonging to the same group are similar or identical. This paper aims to provide an easy and straightforward approach for estimating the underlying latent groups. This approach is based on the hierarchical agglomerative clustering (HAC) of kernel estimates of the heterogeneous time-varying coefficients when the number of groups is known. We establish the consistency of this clustering method and also propose a generalised information criterion for estimating the number of groups when it is unknown. Simulation studies are carried out to examine the finite sample properties of the proposed clustering method as well as the post-clustering estimation of the group-specific time-varying coefficients. The simulation results show that our methods give comparable performance as the penalised-sieve-estimation-based classifier-LASSO approach by Su et al. (2018), but are computationally easier. An application to a panel study of economic growth is also provided.

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© 2019 Royal Economic Society. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

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