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Testing for Panel Cointegration with Multiple Structural Breaks

This paper proposes an LM test for the null hypothesis of cointegration that allows for the possibility of multiple structural breaks in both the level and trend of a cointegrated panel regression. The test is general enough to allow for endogenous regressors, serial correlation and an unknown number of breaks that may be located at different dates for different individuals. We derive the limiting distribution of the test and conduct a small Monte Carlo study to investigate its finite sample properties. In our empirical application to the Feldstein-Horioka Puzzle, we find evidence of cointegration between saving and investment once a level break is accommodated.

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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2005:12.

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Length: 35 pages
Date of creation: 26 Jan 2005
Date of revision:
Publication status: Published in Oxford Bulletin of Economics and Statistics, 2006, pages 101-132.
Handle: RePEc:hhs:lunewp:2005_012
Contact details of provider: Postal:
Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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  1. Peter C.B. Phillips & Sam Ouliaris, 1987. "Asymptotic Properties of Residual Based Tests for Cointegration," Cowles Foundation Discussion Papers 847R, Cowles Foundation for Research in Economics, Yale University, revised Jul 1988.
  2. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
  3. Hoffmann, Mathias, 2004. "International capital mobility in the long run and the short run: can we still learn from saving-investment data?," Journal of International Money and Finance, Elsevier, vol. 23(1), pages 113-131, February.
  4. Saikkonen, Pentti, 1991. "Asymptotically Efficient Estimation of Cointegration Regressions," Econometric Theory, Cambridge University Press, vol. 7(01), pages 1-21, March.
  5. Shin, Yongcheol, 1994. "A Residual-Based Test of the Null of Cointegration Against the Alternative of No Cointegration," Econometric Theory, Cambridge University Press, vol. 10(01), pages 91-115, March.
  6. Hansen, Bruce E, 2002. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 45-59, January.
  7. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  8. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  9. Banerjee, A. & Marcellino, M. & Osbat, C., 2000. "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-economic Data," Economics Working Papers eco2000/20, European University Institute.
  10. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  11. Wu, Jyh-Lin, 2000. "Mean reversion of the current account: evidence from the panel data unit-root test," Economics Letters, Elsevier, vol. 66(2), pages 215-222, February.
  12. Jan Lemmen & Sylvester Eijffinger, 1995. "The quantity approach to financial integration: The Feldstein-Horioka criterion revisited," Open Economies Review, Springer, vol. 6(2), pages 145-165, April.
  13. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  14. Schmidt, Peter & Phillips, C B Peter, 1992. "LM Tests for a Unit Root in the Presence of Deterministic Trends," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 257-87, August.
  15. Chihwa Kao & Suzanne McCoskey, 1997. "A Residual-Based Test Of The Null Of Cointegration In Panel Data," Econometrics 9711002, EconWPA.
  16. repec:cup:etheor:v:10:y:1994:i:1:p:95-115 is not listed on IDEAS
  17. Lori Leachman, 1991. "Saving, investment, and capital mobility among OECD countries," Open Economies Review, Springer, vol. 2(2), pages 137-163, June.
  18. Daniel Levy, 2000. "Investment-Saving Comovement and Capital Mobility: Evidence from Century Long U.S. Time Series," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 100-137, January.
  19. Hao, K., 1996. "Testing for Structural Change in Cointegrated Regression Models: Some Comparisons and Generalizations," Monash Econometrics and Business Statistics Working Papers 3/96, Monash University, Department of Econometrics and Business Statistics.
  20. Suzanne McCoskey & Chihwa Kao, 1999. "A Monte Carlo Comparison of Tests for Cointegration in Panel Data," Center for Policy Research Working Papers 3, Center for Policy Research, Maxwell School, Syracuse University.
  21. Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
  22. Taylor, Alan M., 2002. "A century of current account dynamics," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 725-748, November.
  23. Coakley, Jerry & Kulasi, Farida & Smith, Ron, 1996. "Current Account Solvency and the Feldstein-Horioka Puzzle," Economic Journal, Royal Economic Society, vol. 106(436), pages 620-27, May.
  24. Ozmen, Erdal & Parmaksiz, Kagan, 2003. "Policy regime change and the Feldstein-Horioka puzzle: the UK evidence," Journal of Policy Modeling, Elsevier, vol. 25(2), pages 137-149, February.
  25. Alan Bartley, William & Lee, Junsoo & Strazicich, Mark C., 2001. "Testing the null of cointegration in the presence of a structural break," Economics Letters, Elsevier, vol. 73(3), pages 315-323, December.
  26. Hao, K. & Inder, B., 1994. "A Diagnostic Test for Structural Change in Cointegrated Regression Models," Monash Econometrics and Business Statistics Working Papers 19/94, Monash University, Department of Econometrics and Business Statistics.
  27. Jakob Haan & Clemens Siermann, 1994. "Saving, investment, and capital mobility: A comment on Leachman," Open Economies Review, Springer, vol. 5(1), pages 5-17, March.
  28. Alexakis, Panayotis & Apergis, Nicholas, 1994. "The Feldstein-Horioka puzzle and exchange rate regimes: Evidence from cointegration tests," Journal of Policy Modeling, Elsevier, vol. 16(5), pages 459-472, October.
  29. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  30. Amsler, Christine & Lee, Junsoo, 1995. "An LM Test for a Unit Root in the Presence of a Structural Change," Econometric Theory, Cambridge University Press, vol. 11(02), pages 359-368, February.
  31. Lucio Sarno & Mark Taylor, 1998. "Exchange controls, international capital flows and saving-investment correlations in the UK: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 134(1), pages 69-98, March.
  32. Peter C.B. Phillips & Bruce E. Hansen, 1988. "Statistical Inference in Instrumental Variables," Cowles Foundation Discussion Papers 869R, Cowles Foundation for Research in Economics, Yale University, revised Apr 1989.
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