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Testing for Error Correction in Panel Data

  • Joakim Westerlund

This paper proposes new error correction-based cointegration tests for panel data. The limiting distributions of the tests are derived and critical values provided. Our simulation results suggest that the tests have good small-sample properties with small size distortions and high power relative to other popular residual-based panel cointegration tests. In our empirical application, we present evidence suggesting that international healthcare expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for. Copyright 2007 Blackwell Publishing Ltd.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0084.2007.00477.x
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Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 69 (2007)
Issue (Month): 6 (December)
Pages: 709-748

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Handle: RePEc:bla:obuest:v:69:y:2007:i:6:p:709-748
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  1. Joakim Westerlund, 2005. "Data Dependent Endogeneity Correction in Cointegrated Panels," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(5), pages 691-705, October.
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  16. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  17. Joakim Westerlund, 2005. "New Simple Tests for Panel Cointegration," Econometric Reviews, Taylor & Francis Journals, vol. 24(3), pages 297-316.
  18. McCoskey, Suzanne K. & Selden, Thomas M., 1998. "Health care expenditures and GDP: panel data unit root test results," Journal of Health Economics, Elsevier, vol. 17(3), pages 369-376, June.
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  22. Gerdtham, Ulf-G. & Löthgren, Mickael, 1998. "On stationarity and cointegration of international health expenditure and GDP," SSE/EFI Working Paper Series in Economics and Finance 232, Stockholm School of Economics, revised 29 Jan 1999.
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  24. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation for Research in Economics, Yale University.
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  27. Hansen, Paul & King, Alan, 1996. "The determinants of health care expenditure: A cointegration approach," Journal of Health Economics, Elsevier, vol. 15(1), pages 127-137, February.
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