FGLS is a way to get around the heteroskedasticity in least squares. I
don't have any book with me right now (you need to take a look at any
econometrics textbook to get exact procedures). Basically FGLS is done
with the following 3 steps. In the first step, you run least squares and
get residuals. In the second step, you calculate, in this case, the first
order autocovariances of the residuals. In the final step, you use these
estimated autocovariances and run least squares. It should be
straightforward to do this in R.
Also, I'm not clear (a) what panel-specific
process is, and (b) why
excluding one year "mitigates autocorrelation"? Does it matter which
year is excluded?
(a) they are referring to the fact that there might be unobserved effects
specific to countries or individuals (whatever your units are).
(b) you can't include all the year dummy variables if you have an
intercept. so it doesn't matter which year is excluded.
Kosuke