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

  • Groen, Jan J J
  • Kleibergen, Frank

We propose a likelihood-based framework for cointegration analysis in panels of a fixed number of vector error-correction (VEC) models. We obtain likelihood ratio statistics to test for a common cointegration rank across the individual VEC models with both heterogeneous and homogeneous cointegrating vectors. Their limiting distributions are a summation of the limiting behavior of Johansen trace statistics. We extend the asymptotic distribution theory to cover the case of an infinite cross-sectional dimension. We apply the framework to a dataset of exchange rates and appropriate monetary fundamentals. We find evidence for the validity of the monetary exchange rate model within a panel of VEC models for three major European countries, whereas the results based on individual VEC models for each of these countries separately are less supportive.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 21 (2003)
Issue (Month): 2 (April)
Pages: 295-318

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Handle: RePEc:bes:jnlbes:v:21:y:2003:i:2:p:295-318
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  18. Larsson, Rolf & Lyhagen, Johan & Löthgren, Mickael, 1998. "Likelihood-Based Cointegration Tests in Heterogeneous Panels," SSE/EFI Working Paper Series in Economics and Finance 250, Stockholm School of Economics, revised 27 Aug 1998.
  19. Groen, Jan J. J., 2000. "The monetary exchange rate model as a long-run phenomenon," Journal of International Economics, Elsevier, vol. 52(2), pages 299-319, December.
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