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Panel Error Correction Testing with Global Stochastic Trends

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Author Info
Gengenbach, Christian
Urbain, Jean-Pierre
Westerlund, Joakim (METEOR)

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Abstract

This paper considers a cointegrated panel data model with common factors. Starting from the triangular representation of the model as used by Bai et al. (2008) a Granger type representation theorem is derived. The conditional error correction representation is obtained, which is used as a basis for developing two new tests for the null hypothesis of noerror correction. The asymptotic distributions of the tests are shown to be free of nuisanceparameters, depending only on the number of non-stationary variables. However, the tests are not cross-sectionally independent, which makes pooling difficult. Nevertheless, the averages of the tests converge in distribution. This makes pooling possible in spite of the cross-sectional dependence. We investigate the nite sample performance of the proposed tests in a Monte Carlo experiment and compare them to the tests proposed by Westerlund (2007). We also present two empirical applications of the new tests.

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Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 051.

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Date of creation: 2008
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Handle: RePEc:dgr:umamet:2008051

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Keywords: econometrics;

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  1. 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)
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  2. Peter Boswijk, H., 1994. "Testing for an unstable root in conditional and structural error correction models," Journal of Econometrics, Elsevier, vol. 63(1), pages 37-60, July. [Downloadable!] (restricted)
  3. Pesavento, Elena, 2004. "Analytical evaluation of the power of tests for the absence of cointegration," Journal of Econometrics, Elsevier, vol. 122(2), pages 349-384, October. [Downloadable!] (restricted)
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  4. 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)
  5. Rapach, David E. & Wohar, Mark E., 2004. "Testing the monetary model of exchange rate determination: a closer look at panels," Journal of International Money and Finance, Elsevier, vol. 23(6), pages 867-895, October. [Downloadable!] (restricted)
  6. 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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  7. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2004. "Some cautions on the use of panel methods for integrated series of macroeconomic data," Econometrics Journal, Royal Economic Society, vol. 7(2), pages 322-340, December. [Downloadable!] (restricted)
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  8. 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!]
  9. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March. [Downloadable!]
  10. Cappuccio, Nunzio & Lubian, Diego, 1996. "Triangular Representation and Error Correction Mechanism in Cointegrated Systems," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 409-15, May.
  11. Palm, Franz C. & Smeekes, Stephan & Urbain, Jean-Pierre, 2007. "A Sieve Bootstrap Test for Cointegration in a Conditional Error Correction Model," Research Memoranda 054, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  12. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July. [Downloadable!] (restricted)
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  13. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June. [Downloadable!]
  14. Jong Eun Lee, 2002. "On the Characterisation of the World Real Interest Rate," The World Economy, Blackwell Publishing, vol. 25(2), pages 247-255, 02. [Downloadable!] (restricted)
  15. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February. [Downloadable!] (restricted)
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  16. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December. [Downloadable!] (restricted)
  17. Urbain, Jean-Pierre, 1992. "On Weak Exogeneity in Error Correction Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(2), pages 187-207, May.
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  18. Joakim Westerlund, 2008. "Panel cointegration tests of the Fisher effect," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(2), pages 193-233. [Downloadable!]
  19. 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. [Downloadable!]
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  20. Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001. "Likelihood-based cointegration tests in heterogeneous panels," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 41.
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  21. Anindya Banerjee & Josep Lluís Carrion-i-Silvestre, 2006. "Cointegration in Panel Data with Breaks and Cross-Section Dependence," Economics Working Papers ECO2006/5, European University Institute. [Downloadable!]
  22. 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)
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