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Panel Methods to Test for Unit Roots and Cointegration

In: Palgrave Handbook of Econometrics

Author

Listed:
  • Anindya Banerjee
  • Martin Wagner

Abstract

We provide an up-to-date analytical survey of methods which have been developed to deal with estimation and inference in non-stationary panels. The chapter provides information not only on the tools but also interprets the literature and highlights the important challenges that remain. We discuss the difficulties involved in formulating hypotheses within a panel framework with unit roots and cointegration. These issues include incorporating cross-sectional dependence and structural breaks in the data. Both these features are widely prevalent in the panels and lead to complications in estimation and inference. For example, factor models are a widely used class of methods used to deal with dependence but constitute only one of several ways of formulating the problems involved. We argue that the links between cointegration and factor models in panels need to be considered adequately and the asymptotic theory put on a firmer footing in many respects. The study of cross-sectional dependence, breaks, and multiple cointegrating vectors, all of which are in their relative infancy, mark the way for productive research in the years ahead.

Suggested Citation

  • Anindya Banerjee & Martin Wagner, 2009. "Panel Methods to Test for Unit Roots and Cointegration," Palgrave Macmillan Books, in: Terence C. Mills & Kerry Patterson (ed.), Palgrave Handbook of Econometrics, chapter 13, pages 632-726, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-0-230-24440-5_13
    DOI: 10.1057/9780230244405_13
    as

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