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Testing for Error Correction in Panel Data

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Abstract

This paper proposes four new tests for the null hypothesis of no cointegration in panel data that are based on the error correction parameter in a conditional error correction model. The limit distribution of the test statistics are derived and critical values are provided. Our Monte Carlo results suggest that the tests have reasonable size properties and good power relative to other popular residual-based cointegration tests. These differences arises because latter imposes a possibly invalid common factor restriction. In our empirical application, we present evidence suggesting that international health care expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for.

Suggested Citation

  • Westerlund, Joakim, 2005. "Testing for Error Correction in Panel Data," Working Papers 2005:11, Lund University, Department of Economics.
  • Handle: RePEc:hhs:lunewp:2005_011
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    Keywords

    Panel Cointegration Test; Monte Carlo Simulation; Common Factor Restriction; International Health Care Expenditures.;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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