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Tests for cointegration in panels with regime shifts

  • Luciano Gutierrez

    (University of Sassari)

In the paper we extend Gregory and Hansen’s (1996)ADF, Za, Zt cointegration tests to panel data, using the method proposed in Maddala and Wu (1999). We test the null hypothesis of no cointegration for all the units in the panel against the alternative hypothesis of cointegration, while allowing for a one-time regime shift of unknown timing for at least some regressions. We derive the panel tests for the ADF, Za, Zt tests , and compare these tests with Pedroni’s (1999) panel cointegration tests. We show that Gregory and Hansen’s (1996) panel tests have higher power to reject null when there is a structural change in the cointegration vector. We apply the statistics to the analysis of the well known Feldstein-Horioka puzzle for a sample of sixteen OCDE countries. After we allow for a structural break in the cointegration regression, we find strong evidence of cointegration between saving and investment rates.

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File URL: http://128.118.178.162/eps/em/papers/0505/0505007.pdf
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Paper provided by EconWPA in its series Econometrics with number 0505007.

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Length: 16 pages
Date of creation: 24 May 2005
Date of revision:
Handle: RePEc:wpa:wuwpem:0505007
Note: Type of Document - pdf; pages: 16
Contact details of provider: Web page: http://128.118.178.162

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  1. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  2. Suzanne McCoskey & Chihwa Kao, 1998. "A residual-based test of the null of cointegration in panel data," Econometric Reviews, Taylor & Francis Journals, vol. 17(1), pages 57-84.
  3. 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.
  4. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, 2005. "Testing for PPP: Should we use panel methods?," Empirical Economics, Springer, vol. 30(1), pages 77-91, January.
  5. MacKinnon, James G, 1994. "Approximate Asymptotic Distribution Functions for Unit-Root and Cointegration Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 167-76, April.
  6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  7. Hansen, Bruce E, 1992. "Tests for Parameter Instability in Regressions with I(1) Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 321-35, July.
  8. Leybourne, S J & McCabe, B P M, 1994. "A Consistent Test for a Unit Root," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 157-66, April.
  9. Gutierrez, Michele Mario & Gutierrez, Luciano, 2003. "International R&D Spillovers And Productivity Growth In The Agricultural Sector. A Panel Cointegration Approach," 2003 Annual Meeting, August 16-22, 2003, Durban, South Africa 25884, International Association of Agricultural Economists.
  10. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  11. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(03), pages 597-625, June.
  12. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
  13. Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
  14. Syed Abul Basher & Mohammed Mohsin, 2004. "PPP tests in cointegrated panels: evidence from Asian developing countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(3), pages 163-166.
  15. Kyung-So Im & Junsoo Lee & Margie Tieslau, 2005. "Panel LM Unit-root Tests with Level Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 393-419, 06.
  16. Chang, Yoosoon & Park, Joon Y. & Song, Kevin, 2006. "Bootstrapping cointegrating regressions," Journal of Econometrics, Elsevier, vol. 133(2), pages 703-739, August.
  17. Gutierrez, Luciano, 2003. "On the power of panel cointegration tests: a Monte Carlo comparison," Economics Letters, Elsevier, vol. 80(1), pages 105-111, July.
  18. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
  19. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  20. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers 2000-02, Department of Economics, Williams College.
  21. Gregory, Allan W. & Nason, James M. & Watt, David G., 1996. "Testing for structural breaks in cointegrated relationships," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 321-341.
  22. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  23. Anindya Banerjee & Paolo Zanghieri, 2003. "A New Look at the Feldstein-Horioka Puzzle using an Integrated Panel," Working Papers 2003-22, CEPII research center.
  24. 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.
  25. Westerlund, Joakim, 2005. "Testing for Panel Cointegration with Multiple Structural Breaks," Working Papers 2005:12, Lund University, Department of Economics.
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