by **harry_tuttle** on Wed Aug 24, 2011 12:27 am

time: t = 1,...,T

cross-section: i = 1,...,N

A time series first order var would look like this:

y(t) = a1 + b11y(t-1) + b12x(t-1) + c1(t)

x(t) = a2 + b21y(t-1) + b22x(t-1) + c2(t)

The coefficients a1, b11 etc. would be estimated by using OLS for the y(t)-equation and the x(t)-equation.

A panel first order var could look like this:

y(1,t) = a11 + b111y(1,t-1) + b112x(1,t-1) + c11(t)

y(2,t) = a21 + b211y(2,t-1) + b212x(2,t-1) + c21(t)

...

y(N,t) = aN1 + bN11y(N,t-1) + bN12x(t-1) + cN1(t)

x(1,t) = a12 + b121y(1,t-1) + b122x(1,t-1) + c12(t)

x(2,t) = a22 + b221y(2,t-1) + b222x(2,t-1) + c22(t)

...

x(N,t) = aN2 + bN21y(n,t-1) + bN22x(n,t-1) + cN2(t)

If each equation would be estimated by using OLS you would get different coefficients for each cross-section.

I guess Eviews doesn't consider different coefficients for each cross-section, so we have:

y(1,t) = a1 + b11y(1,t-1) + b12x(1,t-1) + c1(t)

y(2,t) = a1 + b11y(2,t-1) + b12x(2,t-1) + c1(t)

...

y(N,t) = a1 + b11y(N,t-1) + b12x(N,t-1) + c1(t)

x(1,t) = a2 + b21y(1,t-1) + b22x(1,t-1) + c2(t)

...

x(N,t) = a2 + b21y(N,t-1) + b22x(N,t-1) + c2(t)

Does Evies estimate these coefficients by pooled OLS (minimizing the sum of squares for all t an i)?

Sorry for the confusing display, I don't know how to incorporate mathematical formulas into my post.