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Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data

Author

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  • Anindya Banerjee
  • Massimiliano Marcellino
  • Chiara Osbat

Abstract

We show how the use of panel data methods such as those proposed in single equations by Kao (1999) and Pedroni (1999) or in systems by Larsson and Lyhagen (1999) to investigate economic hypotheses such as purchasing power parity or the term structure of interest rates may be affected by the existence of cross-unit cointegrating relations. The existing literature assumes that such relations, that tie the units of the panel together, are not present. Using empirical examples from a panel of OECD countries we show that this assumption is very likely to be violated. Simulations of the properties of panel cointegration tests in the presence of cross-unit relations are then presented to demonstrate the serious cost of assuming away such relations. Some fixes are proposed as a way of dealing with these more general scenarios.

Suggested Citation

  • Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, "undated". "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data," Working Papers 170, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  • Handle: RePEc:igi:igierp:170
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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