Likelihood-Based Cointegration Analysis in Panels of Vector Error Correction Models
AbstractWe 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, and extend the asymptotic distribution theory to cover the case of an infinite cross-section dimension. 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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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 646.
Date of creation: 2001
Date of revision:
likelihood; GMM; cointegration; panels of vector error correction models; common cointegration rank; exchange rates;
Other versions of this item:
- Groen, Jan J J & Kleibergen, Frank, 2003. "Likelihood-Based Cointegration Analysis in Panels of Vector Error-Correction Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(2), pages 295-318, April.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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