Cointegration Vector Estimation by Panel DOLS and Long-Run Money Demand
AbstractWe study the panel DOLS estimator of a homogeneous cointegration vector for a balanced panel of N individuals observed over T time periods. Allowable heterogeneity across individuals include individual-specific time trends, individual-specific fixed effects and time-specific effects. The estimator is fully parametric, computationally convenient, and more precise than the single equation estimator. For fixed N as T approaches infinity, the estimator converges to a function of Brownian motions and the Wald statistic for testing a set of linear constraints has a limiting chi-square distribution. The estimator also has a Gaussian sequential limit distribution that is obtained first by letting T go to infinity then letting N go to infinity. In a series of Monte Carlo experiments, we find that the asymptotic distribution theory provides a reasonably close approximation to the exact finite sample distribution. We use panel dynamic OLS to estimate coefficients of the long-run money demand function from a panel of 19 countries with annual observations that span from 1957 to 1996. The estimated income elasticity is 1.08 (asymptotic s.e.=0.26) and the estimated interest rate semi-elasticity is -0.02 (asymptotic s.e.=0.01).
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Date of creation: Dec 2002
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- Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-09 (All new papers)
- NEP-ECM-2002-12-11 (Econometrics)
- NEP-ETS-2002-12-09 (Econometric Time Series)
- NEP-MON-2002-12-09 (Monetary Economics)
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