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Panel cointegration with global stochastic trends

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Author Info
Bai, Jushan
Kao, Chihwa
Ng, Serena

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Abstract

This paper studies estimation of panel cointegration models with cross-sectional dependence generated by unobserved global stochastic trends. The standard least squares estimator is, in general, inconsistent owing to the spuriousness induced by the unobservable I(1) trends. We propose two iterative procedures that jointly estimate the slope parameters and the stochastic trends. The resulting estimators are referred to respectively as CupBC (continuously-updated and bias-corrected) and the CupFM (continuously-updated and fully-modified) estimators. We establish their consistency and derive their limiting distributions. Both are asymptotically unbiased and (mixed) normal and permit inference to be conducted using standard test statistics. The estimators are also valid when there are mixed stationary and non-stationary factors, as well as when the factors are all stationary.

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File URL: http://www.sciencedirect.com/science/article/B6VC0-4V0MX16-1/2/b86a7bd8ce23d68faf5981ca2a5ce6e9
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Publisher Info
Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 149 (2009)
Issue (Month): 1 (April)
Pages: 82-99
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Handle: RePEc:eee:econom:v:149:y:2009:i:1:p:82-99

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Web page: http://www.elsevier.com/locate/jeconom

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Related research
Keywords: Panel data Common shocks Co-movements Cross-sectional dependence Factor analysis Fully-modified estimator;

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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.:
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    Other versions:
  2. Donald W.K. Andrews, 2003. "Cross-section Regression with Common Shocks," Cowles Foundation Discussion Papers 1428, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  3. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07. [Downloadable!] (restricted)
    Other versions:
  4. Phillips, P C B & Durlauf, S N, 1986. "Multiple Time Series Regression with Integrated Processes," Review of Economic Studies, Blackwell Publishing, vol. 53(4), pages 473-95, August. [Downloadable!] (restricted)
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  5. 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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  6. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 525-546, April. [Downloadable!] (restricted)
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  7. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December. [Downloadable!] (restricted)
  8. Hyungsik Roger Moon & Peter C. B. Phillips, 2004. "GMM Estimation of Autoregressive Roots Near Unity with Panel Data," Econometrica, Econometric Society, vol. 72(2), pages 467-522, 03. [Downloadable!] (restricted)
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  9. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January. [Downloadable!] (restricted)
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  10. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06. [Downloadable!] (restricted)
  11. 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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  12. Yoosoon Chang, 2000. "Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency," Cowles Foundation Discussion Papers 1251, Cowles Foundation, Yale University. [Downloadable!]
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  13. Gengenbach,Christian & Palm,Franz C. & Urbain,Jean-Pierre, 2005. "Panel Cointegration Testing in the Presence of Common Factors," Research Memoranda 050, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  14. Yoosoon Chang, 2000. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," CIRJE F-Series CIRJE-F-85, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
    Other versions:
  15. Gengenbach,Christian & Palm,Franz & Urbain,Jean-Pierre, 2004. "Panel Unit Root Tests in the Presence of Cross-Sectional Dependencies: Comparison and Implications for Modelling," Research Memoranda 040, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  16. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May. [Downloadable!] (restricted)
  17. Phillips, Peter C B & Hansen, Bruce E, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Blackwell Publishing, vol. 57(1), pages 99-125, January. [Downloadable!] (restricted)
  18. Hyungsik R. Moon & Peter C.B. Phillips, 1999. "Estimation of Autoregressive Roots Near Unity Using Panel Data," Cowles Foundation Discussion Papers 1224, Cowles Foundation, Yale University. [Downloadable!]
    Other versions:
  19. Peter C.B. Phillips, 1995. "Unit Root Tests," Cowles Foundation Discussion Papers 1104, Cowles Foundation, Yale University. [Downloadable!]
  20. Hansen, Bruce E., 1992. "Efficient estimation and testing of cointegrating vectors in the presence of deterministic trends," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 87-121. [Downloadable!] (restricted)
  21. M. Hashem Pesaran & Takashi Yamagata, 2005. "Testing Slope Homogeneity in Large Panels," IEPR Working Papers 05.14, Institute of Economic Policy Research (IEPR). [Downloadable!]
    Other versions:
  22. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  23. Bai, Jushan, 2004. "Estimating cross-section common stochastic trends in nonstationary panel data," Journal of Econometrics, Elsevier, vol. 122(1), pages 137-183, September. [Downloadable!] (restricted)
  24. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, 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. Anindya Banerjee & Massimiliano Marcellino, 2008. "Factor-augmented Error Correction Models," Working Papers 335, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  2. Eberhardt, Markus & Teal, Francis, 2009. "Econometrics for Grumblers: A New Look at the Literature on Cross-Country Growth Empirics," MPRA Paper 15813, University Library of Munich, Germany. [Downloadable!]
  3. Eberhardt, Markus & Bond, Stephen, 2009. "Cross-section dependence in nonstationary panel models: a novel estimator," MPRA Paper 17692, University Library of Munich, Germany, revised 14 Oct 2009. [Downloadable!]
  4. Joseph P. Byrne & Norbert Fiess & Ronald MacDonald, 2008. "The Global Dimension to Fiscal Sustainability," Working Papers 2008_10, Department of Economics, University of Glasgow. [Downloadable!]
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