Aggregation in large dynamic panels
Abstract: This paper investigates the problem of aggregation in the case of large linear dynamic panels, where each micro unit is potentially related to all other micro units, and where micro innovations are allowed to be cross sectionally dependent. Following Pesaran (2003), an optimal aggregate function is derived and used (i) to establish conditions under which Granger's (1980) conjecture regarding the long memory properties of aggregate variables from \"a very large scale dynamic, econometric model\" holds, and (ii) to show which distributional features of micro parameters can be identified from the aggregate model. ; The paper also derives impulse response functions for the aggregate variables, distinguishing between the effects of macro and aggregated idiosyncratic shocks. Some of the findings of the paper are illustrated by Monte Carlo experiments. The paper also contains an empirical application to consumer price inflation in Germany, France and Italy, and re-examines the extent to which \"observed\" inflation persistence at the aggregate level is due to aggregation and/or common unobserved factors. Our findings suggest that dynamic heterogeneity as well as persistent common factors are needed for explaining the observed persistence of the aggregate inflation.
File(s): File format is application/pdf http://www.dallasfed.org/assets/documents/institute/wpapers/2011/0101.pdf
Provider: Federal Reserve Bank of Dallas
Part of Series: Globalization Institute Working Papers
Publication Date: 2011
Pages: 35 pages
Note: Published as: Pesaran, M. Hashem and Alexander Chudik (2014), "Aggregation in Large Dynamic Panels," Journal of Econometrics 178 (Part 2): 273-285.