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Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand

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Author Info
Nelson C. Mark
Donggyu Sul

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Abstract

We study the panel dynamic ordinary least square (DOLS) estimator of a homogeneous cointegration vector for a balanced panel of "N" individuals observed over "T" time periods. Allowable heterogeneity across individuals include individual-specific time trends, individual-specific fixed effects and time-specific effects. The estimator is fully parametric, computationally convenient, and more precise than the single equation estimator. For fixed "N" as "T" goes to infinity, the estimator converges to a function of Brownian motions and the Wald statistic for testing a set of "s" linear constraints has a limiting chi-squared("s") distribution. The estimator also has a Gaussian sequential limit distribution that is obtained first by letting "T" goes to infinity and then letting "N" go to infinity. In a series of Monte-Carlo experiments, we find that the asymptotic distribution theory provides a reasonably close approximation to the exact finite sample distribution. We use panel DOLS to estimate coefficients of the long-run money demand function from a panel of 19 countries with annual observations that span from 1957 to 1996. The estimated income elasticity is 1.08 (asymptotic s.e. = 0.26) and the estimated interest rate semi-elasticity is - 0.02 (asymptotic s.e.=0.01). Copyright 2003 Blackwell Publishing Ltd.

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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics & Statistics.

Volume (Year): 65 (2003)
Issue (Month): 5 (December)
Pages: 655-680
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Handle: RePEc:bla:obuest:v:65:y:2003:i:5:p:655-680

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Laurence Ball, 1998. "Another Look at Long-Run Money Demand," NBER Working Papers 6597, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques. [Downloadable!]
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  3. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January. [Downloadable!] (restricted)
  4. repec:cup:etheor:v:7:y:1991:i:1:p:1-21 is not listed on IDEAS
  5. Peter C.B. Phillips & Hyungsik R. Moon, . "Nonstationary Panel Data Analysis: An Overview of Some Recent Developments," University of California Santa Barbara - Department of Economics 17-98, California Santa Barbara - Department of Economics.
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  6. Gandolfi, Arthur E & Lothian, James R, 1976. "The Demand for Money from the Great Depression to the Present," American Economic Review, American Economic Association, vol. 66(2), pages 46-51, May. [Downloadable!] (restricted)
  7. Stock, James H & Watson, Mark W, 1993. "A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems," Econometrica, Econometric Society, vol. 61(4), pages 783-820, July. [Downloadable!] (restricted)
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  8. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I. [Downloadable!] (restricted)
  9. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation, Yale University. [Downloadable!]
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  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I. [Downloadable!] (restricted)
  11. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 317-339, April. [Downloadable!] (restricted)
  12. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January. [Downloadable!] (restricted)
  13. Peter C.B.Phillips & Donggyu Sul, 2002. "Dynamic Panel Estimation and Homogeneity Testing Under Cross Section Dependence," Cowles Foundation Discussion Papers 1362, Cowles Foundation, Yale University. [Downloadable!]
  14. Sala-i-Martin, X. & Mulligan, C.B., 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Papers 671, Yale - Economic Growth Center.
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