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Testing weak exogeneity in cointegrated panels

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  • Moral-Benito, Enrique
  • Serven, Luis

Abstract

For reason of empirical tractability, analysis of cointegrated economic time series is often developed in a partial setting, in which a subset of variables is explicitly modeled conditional on the rest. This approach yields valid inference only if the conditioning variables are weakly exogenous for the parameters of interest. This paper proposes a new test of weak exogeneity in panel cointegration models. The test has a limiting Gumbel distribution that is obtained by first letting the time dimension of the panel go to infinity and then letting its cross-sectional dimension go to infinity. The paper evaluates the accuracy of the asymptotic approximation in finite samples via simulation experiments. Finally, as an empirical illustration, the paper reports tests of weak exogeneity of disposable income and wealth in an aggregate consumption equation.

Suggested Citation

  • Moral-Benito, Enrique & Serven, Luis, 2014. "Testing weak exogeneity in cointegrated panels," Policy Research Working Paper Series 7045, The World Bank.
  • Handle: RePEc:wbk:wbrwps:7045
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    References listed on IDEAS

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    Cited by:

    1. David Mayer-Foulkes & Kurt A. Hafner, 2017. "The technology Gradient in the Market Economy," Working papers DTE 606, CIDE, División de Economía.

    More about this item

    Keywords

    Scientific Research&Science Parks; Science Education; Economic Theory&Research; Statistical&Mathematical Sciences; Econometrics;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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

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