Introducing sspaneltvp: A Code to Estimating State-Space Time-Varying Parameter Models in Panels. An Application to Okun’s Law

Abstract

This paper introduces a new code that provides researchers with a complete toolbox for estimating state-space time-varying parameter models. Our proposal extends the simple seminal framework into a panel-data one, combining both fixed (either common or country-specific) and varying components. Under specific conditions, this setting becomes a mean-reverting model, where the fixed mean parameter may include a deterministic trend. Regarding the transition equation, we allow for estimating different autoregressive alternatives and control instruments whose coefficients can be set up either common or idiosyncratic (this is particularly interesting for detecting asymmetries among individuals, i.e., countries, to common shocks). Furthermore, the GAUSS code allows for restrictions to the variances of both the transition and measurement equations. Finally, we illustrate our proposal with an empirical application to explore Okun’s Law for a panel of EU peripheral countries during the period 1965–2021