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Likelihood-Based Cointegration Tests in Heterogeneous Panels

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Author Info

  • Larsson, Rolf

    (Department of Statistics)

  • Lyhagen, Johan

    () (Department of Information Science, Division of Statistics, Uppsala University)

  • Löthgren, Mickael

    () (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

This paper presents a likelihood-based panel test of cointegrating rank in heterogeneous panel models based on the mean of the individual rank trace statistics. The existence of the first two moments of the asymptotic distribution of the individual trace statistic is established. Based on this, the asymptotic distribution of the test statistic is shown to be normal. The small-sample size and power properties are investigated using Monte Carlo simulations. An empirical example for a consumption model including consumption, income and inflation is estimated for 23 OECD countries over the period 1960-1994. The results indicate that two cointegrating relations exist in the system: One containing consumption and income and one inflation only.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 250.

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Length: 27 pages
Date of creation: 26 Aug 1998
Date of revision: 27 Aug 1998
Publication status: Published in Econometrics Journal, 2001, pages 109-142.
Handle: RePEc:hhs:hastef:0250

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Keywords: Cointegration; Consumption; Monte Carlo simulations; Panel data; Rank test.;

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