Title: Estimation and testing for common breaks in interactive effects panels
Authors: Yiannis Karavias - University of Birmingham (United Kingdom) [presenting]
Joakim Westerlund - Lund University (Sweden)
Abstract: Dealing with structural breaks is an important step in most, if not all, empirical economic research. This is particularly true in panel data comprised of many cross-sectional units, such as individuals, firms or countries, which are all affected by major economic events. The worry is that if left unattended, existing breaks will manifest themselves as omitted variables, leading to inconsistent estimates of the model parameters. It is therefore important to know if and when a structural break has occurred. Of course, such knowledge is rarely available in practice, which means that it has to be inferred from the data. We need to be able to test if there is in fact a break present and, if it is, to infer the date of the break; that is, we need a break detection toolbox. The toolbox should apply to different sized panels, easy to implement and robust to general forms of unobserved heterogeneity. This last demand is potentially significant because unattended heterogeneity can be mistaken for omitted breaks. The purpose of the present paper is to develop a toolbox that meets the above list of demands.