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Micro versus Macro Cointegration in Heterogeneous Panels

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  • Lorenzo Trapani
  • Giovanni Urga

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Abstract

We consider the issue of cross-sectional aggregation in nonstationary and heterogeneous panels where each unit cointegrates. We derive asymptotic properties of the aggregate estimate, and necessary and su¢ cient conditions for cointegration to hold in the aggregate relationship. We then analyze the case when cointegration does not carry through the aggregation process, and we investigate whether the violation of the formal conditions for perfect aggregation can still lead to an aggregate equation that is observationally equivalent to a cointegrated relationship. We derive a measure of the degree of noncointegration of the aggregate relationship and we explore its asymp- totic properties. We propose a valid bootstrap approximation of the test. A Monte Carlo exercise evaluates size and power properties of the bootstrap test.

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Bibliographic Info

Paper provided by Department of Economics and Technology Management, University of Bergamo in its series Working Papers with number 0711.

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Date of creation: 2007
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Handle: RePEc:brh:wpaper:0711

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Keywords: Heterogeneous Panels; Aggregation; Cointegration; Spurious Regression; Bootstrap;

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References

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  1. Gonzalo, J., 1992. "Cointegration and Aggregation," Papers 11, Boston University - Department of Economics.
  2. Lazarov , tep na & Trapani, Lorenzo & Urga, Giovanni, 2007. "Common Stochastic Trends And Aggregation In Heterogeneous Panels," Econometric Theory, Cambridge University Press, vol. 23(01), pages 89-105, February.
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Citations

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Cited by:
  1. Pesaran, M.H. & Chudik, A., 2011. "Aggregation in Large Dynamic Panels," Cambridge Working Papers in Economics 1118, Faculty of Economics, University of Cambridge.
  2. Smeekes Stephan & Urbain Jean-Pierre, 2011. "On the Applicability of the Sieve Bootstrap in Time series Panels," Research Memorandum 055, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Basher, Syed Abul & Elsamadisy, Elsayed Mousa, 2010. "Country Heterogeneity and Long-Run Determinants of Inflation in the Gulf Arab States," MPRA Paper 27348, University Library of Munich, Germany.
  4. Fauceglia, Dario & Shingal, Anirudh & Wermelinger, Martin, 2012. ""Natural hedging" of exchange rate risk: The role of imported input prices," MPRA Paper 39438, University Library of Munich, Germany.

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