System Estimation of Panel Data Models Under Long-Range Dependence

A general dynamic panel data model is considered that incorporates individual and interactive fixed effects allowing for contemporaneous correlation in model innovations. The model accommodates general stationary or nonstationary long-range dependence through interactive fixed effects and innovations, removing the necessity to perform a priori unit-root or stationarity testing. Moreover, persistence in innovations and interactive fixed effects allows for cointegration; innovations can also have vector-autoregressive dynamics; deterministic trends can be featured. Estimations are performed using conditional-sum-of-squares criteria based on projected series by which latent characteristics are proxied. Resulting estimates are consistent and asymptotically normal at standard parametric rates. A simulation study provides reliability on the estimation method. The method is then applied to the long-run relationship between debt and GDP. Supplementary materials for this article are available online.