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Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models

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Author Info
Jan J.J. Groen (Erasmus University Rotterdam)
Frank R. Kleibergen () (University of Amsterdam)

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Abstract

We propose in this paper a likelihood-based framework for cointegration analysis in panels of a fixed number of vector error correction models. Maximum likelihood estimators of the cointegrating vectors are constructed using iterated Generalized Method of Moments estimators. Using these estimators we construct likelihood ratio statistics to test for a common cointegration rank across the individual vector error correction models, both with heterogeneous and homogeneous cointegrating vectors. The corresponding limiting distributions are a summation of the limiting behavior of Johansen (1991) trace statistics. We also incorporate both unrestricted and restricted deterministic components which are either homogeneous or heterogeneous. The proposed framework is applied on a data set of exchange rates and appropriate monetary fundamentals. The test results show strong evidence for the validity of the monetary exchange rate model within a panel of vector error correction models for three major European countries, whereas the results based on individual vector error correction models for each of these countries separately are less supportive.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 99-055/4.

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Date of creation: 05 Aug 1999
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Handle: RePEc:dgr:uvatin:19990055

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  24. M Pesaran & Yongcheol Shin & Ron P Smith, 2004. "Pooled mean group estimation of dynamic heterogeneous panels," ESE Discussion Papers 16, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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. Michael McMahon & Gabriel Sterne & Jamie Thompson, . "The role of ICT in the global investment cycle," Bank of England working papers 257, Bank of England. [Downloadable!]
  2. Martin Wagner & Georg Müller-Fürstenberger, 2004. "The Carbon Kuznets Curve: A Cloudy Picture Emitted by Bad Econometrics?," Diskussionsschriften dp0418, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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  3. Sean Holly & M. Hashem Pesaran & Takashi Yamagata, 2006. "A Spatio-Temporal Model of House Prices in the US," IZA Discussion Papers 2338, Institute for the Study of Labor (IZA). [Downloadable!]
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  4. H. Herwartz & M. Neumann, . "Bootstrap Inference in Single Equation Error Correction Models," Sonderforschungsbereich 373 2000-87, Humboldt Universitaet Berlin.
  5. Westerlund, Joakim & Edgerton, David, 2006. "Simple Tests for Cointegration in Dependent Panels with Structural Breaks," Working Papers 2006:13, Lund University, Department of Economics, revised 28 Jan 2007. [Downloadable!]
  6. António Afonso & Christophe Rault, 2007. "What We Really Know about Fiscal Sustainability in the EU? A Panel Data Diagnostic," Working Papers 2007/20, Department of Economics at the School of Economics and Management (ISEG), Technical University of Lisbon.. [Downloadable!]
  7. Alain Hecq & Franz Palm & Jean-Pierre Urbain, 2002. "Separation, Weak Exogeneity, And P-T Decomposition In Cointegrated Var Systems With Common Features," Econometric Reviews, Taylor and Francis Journals, vol. 21(3), pages 273-307. [Downloadable!] (restricted)
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  8. Jan J J Groen & Clare Lombardelli, . "Real exchange rates and the relative prices of non-traded and traded goods: an empirical analysis," Bank of England working papers 223, Bank of England. [Downloadable!]
  9. Carlos Andrés Amaya, . "Interest Rate Setting and the Colombian Monetary Transmission Mechanism," Borradores de Economia 352, Banco de la Republica de Colombia. [Downloadable!]
  10. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, . "Testing for PPP: Should We Use Panel Methods?," Working Papers 186, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  11. Peter Hansen, 2002. "Generalized Reduced Rank Regression," Working Papers 2002-02, Brown University, Department of Economics. [Downloadable!]
  12. Jacobson, Tor & Lyhagen, Johan & Larsson, Rolf & Nessén, Marianne, 2002. "Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model," Working Paper Series 145, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  13. J.J.J. Groen & F. Kleibergen, 2001. "Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models," WO Research Memoranda (discontinued) 646, Netherlands Central Bank, Research Department. [Downloadable!]
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  14. Stefano Fachin, 2005. "Long-Run Trends in Internal Migrations in Italy: a Study in Panel Cointegration with Dependent Units," Econometrics 0507002, EconWPA. [Downloadable!]
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  15. Westerlund, Joakim & Basher, Syed A., 2007. "Mixed Signals Among Tests for Panel Cointegration," MPRA Paper 3261, University Library of Munich, Germany. [Downloadable!]
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  16. J.J.J. Groen, 2001. "(EURO) Exchange Rate Predictability and Monetary Fundamentals in a Small Multi-Country Panel," WO Research Memoranda (discontinued) 664, Netherlands Central Bank, Research Department. [Downloadable!]
  17. Wagner, Martin & Hlouskova, Jaroslava, 2007. "The Performance of Panel Cointegration Methods. Results from a Large Scale Simulation Study," Economics Series 210, Institute for Advanced Studies. [Downloadable!]
  18. Deniz Dilan Karaman Örsal, 2007. "Comparison of Panel Cointegration Tests," SFB 649 Discussion Papers SFB649DP2007-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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  19. Hecq, Alain & Palm, Franz C. & Urbain, Jean-Pierre, 2000. "Testing for Common Cyclical Features in Nonstationary Panel Data Models," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  20. Carlos Andrés Amaya G., 2005. "Interest Rate Setting And The Colombian Monetary Transmission Mechanism," BORRADORES DE ECONOMIA 002910, BANCO DE LA REPÚBLICA. [Downloadable!]
  21. Luis Eduardo Arango & Luis Fernando Melo, 2006. "Determinantes De La Elección De Administradora De Pensiones: Primeras Estimaciones A Partir De Agregados," BORRADORES DE ECONOMIA 002315, BANCO DE LA REPÚBLICA. [Downloadable!]
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