Pooled Bewley Estimator of Long-Run Relationships in Dynamic Heterogenous Panels

This paper, using the Bewley (1979) transformation of the autoregressive distributed lag model, proposes a novel pooled Bewley (PB) estimator of long-run coefficients for dynamic panels with heterogeneous short-run dynamics, in the same setting as the widely used Pooled Mean Group (PMG) estimator. Asymptotic normality of the PB estimator is established, and Monte Carlo simulations reveal a good small sample performance of PB compared with existing estimators in the literature, namely PMG, PDOLS and FMOLS. This paper also considers application of two bias-correction methods and a bootstrapping of critical values to conduct inference robust to cross-sectional dependence of errors. An empirical application to the aggregate consumption function taken from the original PMG paper illustrates the importance of the choice of individual estimators in practice