Efficient estimation and inference for difference-indifference regressions with persistent errors

Abstract

This paper is concerned with estimation and inference for difference-indifference regressions with errors that exhibit high serial dependence, including near unit roots, unit roots, and linear trends. We propose a couple of solutions based on a parametric formulation of the error covariance. First stage estimates of autoregressive structures are obtained by using the Han, Phillips, and Sul (2011, 2013) X-differencing transformation. The X-differencing method is simple to implement and is unbiased in large N settings. Compared to similar parametric methods, the approach is computationally simple and requires fewer restrictions on the permissible parameter space of the error process. Simulations suggest that our methods perform well in the finite sample across a wide range of panel dimensions and dependence structures. © 2014 by Emerald Group Publishing Limited All rights of reproduction in any form reserved.