THIS SHOCK IS DIFFERENT: ESTIMATION AND INFERENCE IN MISSPECIFIED TWO-WAY FIXED EFFECTS PANEL REGRESSIONS

2025/10/27 by Artūras Juodis · 2 citations

paper · doi:10.1017/s026646662510008x

published in Econometric Theory 42(4), 869-902 (Cambridge University Press (CUP))

crossref issued 2025/10/27 · crossref published 2025/10/27 · crossref published-online 2025/10/27 · crossref created 2025/10/27 · crossref published-print 2026/08/01 · crossref deposited 2026/08/03 · crossref indexed 2026/08/03

Abstract

We investigate the properties of the linear two-way fixed effects (FE) estimator for panel data when the underlying data generating process (DGP) does not have a linear parametric structure. The FE estimator is consistent for some pseudo-true value and we characterize the corresponding asymptotic distribution. We show that the rate of convergence is determined by the degree of model misspecification, and that the asymptotic distribution can be non-normal. We propose a novel autoregressive double adaptive wild (AdaWild) bootstrap procedure applicable for a large class of DGPs. Monte Carlo simulations show that it performs well for panels of small and moderate dimensions. We use data from U.S. manufacturing industries to illustrate the benefits of our procedure.

Citations

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