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Dealing with unobservable common trends in small samples: a panel cointegration approach

Author

Listed:
  • Francesca Di Iorio

    (Universita' di Napoli Federico II)

  • Stefano Fachin

    (Universita' di Roma "La Sapienza")

Abstract

Non stationary panel models allowing for unobservable common trends have recently become very popular. However, standard methods, which are based on factor extraction or models augmented with cross-section averages, require large sample sizes, not always available in practice. In these cases we propose the simple and robust alternative of augmenting the panel regres- sion with common time dummies. The underlying assumption of additive e¤ects can be tested by means of a panel cointegration test, with no need of estimating a general interactive e¤ects model. An application to modelling labour productivity growth in the four major European economies (France, Germany, Italy and UK) illustrates the method.

Suggested Citation

  • Francesca Di Iorio & Stefano Fachin, 2014. "Dealing with unobservable common trends in small samples: a panel cointegration approach," DSS Empirical Economics and Econometrics Working Papers Series 2014/5, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    • Handle: RePEc:sas:wpaper:20145
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    File URL: http://www.dss.uniroma1.it/RePec/sas/wpaper/20145_dif.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Common trends; Panel cointegration; TFP.;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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