Large T and small N : A three-step approach to the identification of cointegrating relationships in time series models with a small cross-sectional dimension
This paper addresses cointegration in small cross-sectional panel data models. In addition to dealing with cointegrating relationships within the cross-sectional dimension, the paper explicitly addresses the issue of cointegration between cross-sections. The approach is based upon a well-known distributional result for the trace test when some of the cointegrating vectors are a priori known, and advocates a three-step procedure for the identification of the cointegrating space when dealing with two-dimensional data. The first step of this procedure utilizes traditional techniques to identify the long-run relationships within each cross-sectional unit separately. In the second step these first step relationships are then treated as known when searching for potential long run relationships between units in a joint analysis comprising the whole cross-sectional dimension. The third step of the procedure then finally reestimate all free parameters of the identified long-run structure to get rid of a potential simultaneity bias as a result of a non-diagonal covariance matrix. Identification of the long-run structures of Norwegian exports and international interest rate relationships are used as examples. Norwegian mainland exports have here been divided into two cross-sectional units; the traditional goods sector and the service sector. While in the study of international interest rate relationships the two sectors investigated are Germany and the US. The examples are used to address the more general issues of the degree of independence in capital markets and in goods markets of small open economies.
|Date of creation:||12 Nov 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +47 22 31 60 00
Fax: +47 22 41 31 05
Web page: http://www.norges-bank.no/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
- Frankel, Jeffrey A. & Rose, Andrew K., 1996.
"A panel project on purchasing power parity: Mean reversion within and between countries,"
Journal of International Economics,
Elsevier, vol. 40(1-2), pages 209-224, February.
- Jeffrey A. Frankel and Andrew K. Rose., 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," Center for International and Development Economics Research (CIDER) Working Papers C95-052, University of California at Berkeley.
- Frankel, Jeffrey A & Rose, Andrew K, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," CEPR Discussion Papers 1128, C.E.P.R. Discussion Papers.
- Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
- Paruolo, Paolo, 1996. "On the determination of integration indices in I(2) systems," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 313-356.
- Larsson, Rolf & Lyhagen, Johan, 1999.
"Likelihood-Based Inference in Multivariate Panel Cointegration Models,"
SSE/EFI Working Paper Series in Economics and Finance
331, Stockholm School of Economics.
- Rolf Larsson & Johan Lyhagen, 2000. "Likelihood-Based Inference in Multivariate Panel Cointegration Models," Econometric Society World Congress 2000 Contributed Papers 1313, Econometric Society.
- Roger Hammersland, 2004. "The degree of independence in European goods markets : An I(2) analysis of German and Norwegian trade data," Working Paper 2004/19, Norges Bank.
- Johansen, S., 1991.
"A Statistical Analsysis of Cointegration for I(2) Variables,"
77, Helsinki - Department of Economics.
- Johansen, Søren, 1995. "A Stastistical Analysis of Cointegration for I(2) Variables," Econometric Theory, Cambridge University Press, vol. 11(01), pages 25-59, February.
- Quah, Danny, 1994.
"Exploiting cross-section variation for unit root inference in dynamic data,"
Elsevier, vol. 44(1-2), pages 9-19.
- Quah, D., 1993. "Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data," Papers 549, Stockholm - International Economic Studies.
- Danny Quah, 1993. "Exploiting Cross Section Variation for Unit Root Inference in Dynamic Data," FMG Discussion Papers dp171, Financial Markets Group.
- Suzanne McCoskey & Chihwa Kao, 1998.
"A residual-based test of the null of cointegration in panel data,"
Taylor & Francis Journals, vol. 17(1), pages 57-84.
- Chihwa Kao & Suzanne McCoskey, 1997. "A Residual-Based Test Of The Null Of Cointegration In Panel Data," Econometrics 9711002, EconWPA.
- Ronald Macdonald & Mark P. Taylor, 1992.
"Exchange Rate Economics: A Survey,"
IMF Staff Papers,
Palgrave Macmillan, vol. 39(1), pages 1-57, March.
- Rolf Larsson & Johan Lyhagen & Mickael Lothgren, 2001.
"Likelihood-based cointegration tests in heterogeneous panels,"
Royal Economic Society, vol. 4(1), pages 41.
- 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.
- Froot, Kenneth A & Thaler, Richard H, 1990. "Foreign Exchange," Journal of Economic Perspectives, American Economic Association, vol. 4(3), pages 179-92, Summer.
- Roger Hammersland, 2004. "Who was in the driving seat in Europe during the nineties, International financial markets or the BUBA?," Working Paper 2004/20, Norges Bank.
- Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Paruolo Paolo, . "LR cointegration tests when some cointegrating relations are known," Economics and Quantitative Methods qf0106, Department of Economics, University of Insubria.
- Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
When requesting a correction, please mention this item's handle: RePEc:bno:worpap:2004_15. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.