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Testing for Panel Cointegration Using Common Correlated Effects

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Author Info

  • Anindya Banerjee
  • Josep Lluis Carrion-i-Silvestre

Abstract

Spurious regression analysis in panel data when time series are cross-section dependent is analyzed in the paper. We show that consistent estimation of the long-run average parameter is possible once we control for cross-section dependence using cross-section averages in the spirit of the common correlated effects approach in Pesaran (2006), Holly, Pesaran and Yamagata (2010) and Kapetanios, Pesaran and Yamagata (2011). This result is used to design a panel cointegration test statistic. The performance of the proposal is investigated in comparison with factor-based methods to control for dependence when both strong and weak cross-section dependence may be present.

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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/11-16.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 11-16.

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Length: 40 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:bir:birmec:11-16

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Postal: Edgbaston, Birmingham, B15 2TT
Web page: http://www.economics.bham.ac.uk
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Related research

Keywords: Panel cointegration; cross-section dependence; common factors; spatial econometrics;

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References

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  1. Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
  2. Sean Holly & M. Hashem Pesaran & Takashi Yamagata, 2006. "A Spatio-Temporal Model of House Prices in the US," CESifo Working Paper Series 1826, CESifo Group Munich.
  3. Peter Phillips & Hyungsik Moon, 2000. "Nonstationary panel data analysis: an overview of some recent developments," Econometric Reviews, Taylor & Francis Journals, vol. 19(3), pages 263-286.
  4. Alexander Chudik & M. Hashem Pesaran & Elisa Tosetti, 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," CESifo Working Paper Series 2689, CESifo Group Munich.
  5. Peter C.B. Phillips, 1985. "Understanding Spurious Regressions in Econometrics," Cowles Foundation Discussion Papers 757, Cowles Foundation for Research in Economics, Yale University.
  6. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, 07.
  7. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  8. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  9. Banerjee, Anindya & Carrion-i-Silvestre, Josep Lluís, 2006. "Cointegration in panel data with breaks and cross-section dependence," Working Paper Series 0591, European Central Bank.
  10. Kapetanios, G. & Pesaran, M.H. & Yamagata, T., 2006. "Panels with Nonstationary Multifactor Error Structures," Cambridge Working Papers in Economics 0651, Faculty of Economics, University of Cambridge.
  11. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  12. Badi H. Baltagi & Georges Bresson & Alain Pirotte, 2006. "Panel Unit Root Tests and Spatial Dependence," Center for Policy Research Working Papers 88, Center for Policy Research, Maxwell School, Syracuse University.
  13. Markus Eberhardt & Anindya Banerjee and J. James Reade, 2010. "Panel Estimation for Worriers," Economics Series Working Papers 514, University of Oxford, Department of Economics.
  14. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
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Cited by:
  1. Gengenbach, Christian & Urbain, Jean-Pierre & Westerlund, Joakim, 2013. "Alternative representations for cointegrated panels with global stochastic trends," Economics Letters, Elsevier, vol. 118(3), pages 485-488.

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