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

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  • Jan J.J. Groen

    (Erasmus University Rotterdam)

  • Frank R. Kleibergen

    ()
    (University of Amsterdam)

Abstract

We propose in this paper a likelihood-based framework forcointegration analysis in panels of a fixed number of vector errorcorrection models. Maximum likelihood estimators of thecointegrating vectors are constructed using iterated GeneralizedMethod of Moments estimators. Using these estimators we constructlikelihood ratio statistics to test for a common cointegrationrank across the individual vector error correction models, bothwith heterogeneous and homogeneous cointegrating vectors. Thecorresponding limiting distributions are a summation of thelimiting behavior of Johansen (1991) trace statistics. We alsoincorporate both unrestricted and restricted deterministiccomponents which are either homogeneous or heterogeneous. Theproposed framework is applied on a data set of exchange rates andappropriate monetary fundamentals. The test results show strongevidence for the validity of the monetary exchange rate modelwithin a panel of vector error correction models for three majorEuropean countries, whereas the results based on individual vectorerror correction models for each of these countries separately areless 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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