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On time-varying panel data models with time-varying interactive fixed effects

Author

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  • Wang, Xia
  • Jin, Sainan
  • Li, Yingxing
  • Qian, Junhui
  • Su, Liangjun

Abstract

This paper introduces a time-varying (TV) panel data model with interactive fixed effects where both the coefficients and factor loadings are allowed to change smoothly over time. We propose a local version of the least squares and principal component method to estimate the TV coefficients, TV factor loadings, and common factors simultaneously. We provide a bias-corrected local least squares estimator for the TV coefficients and establish the limiting distributions and uniform convergence of the bias-corrected coefficient estimators, estimated factors, and factor loadings in the large N and large T framework. Based on the estimates, we propose three test statistics to gauge possible sources of TV features. We establish the limit null distributions and the asymptotic local power properties of our tests. Simulations are conducted to evaluate the finite sample performance of our estimates and tests. We apply our theoretical results to analyze the Phillips curve using the U.S. state-level unemployment rates and nominal wages, and document significant TV behavior in both the slope coefficient and factor loadings.

Suggested Citation

  • Wang, Xia & Jin, Sainan & Li, Yingxing & Qian, Junhui & Su, Liangjun, 2025. "On time-varying panel data models with time-varying interactive fixed effects," Journal of Econometrics, Elsevier, vol. 249(PB).
    • Handle: RePEc:eee:econom:v:249:y:2025:i:pb:s0304407625000144
    DOI: 10.1016/j.jeconom.2025.105960
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    More about this item

    Keywords

    Interactive fixed effects; Panel data models; Phillips curve; Specification test; Time-varying;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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