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Testing for Exogeneity in Cointegrated Panels

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  • Lorenzo Trapani

Abstract

type="main" xml:id="obes12072-abs-0001"> This paper proposes a test for the null that, in a cointegrated panel, the long-run correlation between the regressors and the error term is different from zero. As is well known, in such case the OLS estimator is T-consistent, whereas it is N T -consistent when there is no endogeneity. Other estimators can be employed, such as the FM-OLS, that are N T -consistent irrespective of whether exogeneity is present or not. Using the difference between the former and the latter estimator, we construct a test statistic which diverges at a rate N under the null of endogeneity, whilst it is bounded under the alternative of exogeneity, and employ a randomization approach to carry out the test. Monte Carlo evidence shows that the test has the correct size and good power.

Suggested Citation

  • Lorenzo Trapani, 2015. "Testing for Exogeneity in Cointegrated Panels," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 77(4), pages 475-494, August.
    • Handle: RePEc:bla:obuest:v:77:y:2015:i:4:p:475-494
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    File URL: http://hdl.handle.net/10.1111/obes.2015.77.issue-4
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    Cited by:

    1. Enrique Moral-Benito & Luis Serv鮠, 2015. "Testing weak exogeneity in cointegrated panels," Applied Economics, Taylor & Francis Journals, vol. 47(30), pages 3216-3228, June.
    2. Tabaghdehi, Seyedeh Asieh H. & Hunter, John, 2020. "Long-run price behaviour in the gasoline market - The role of exogeneity," Journal of Business Research, Elsevier, vol. 116(C), pages 620-627.

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