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Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle

  • Di Iorio, Francesca
  • Fachin, Stefano

Stability tests for cointegrating coefficients are known to have very low power with small to medium sample sizes. In this paper we propose to solve this problem by extending the tests to dependent cointegrated panels through the stationary bootstrap. Simulation evidence shows that the proposed panel tests improve considerably on asymptotic tests applied to individual series. As an empirical illustration we examined investment and saving for a panel of 14 European countries over the 1960-2002 period. While the individual stability tests, contrary to expectations and graphical evidence, in almost all cases do not reject the null of stability, the bootstrap panel tests lead to the more plausible conclusion that the long-run relationship between these two variables is likely to have undergone a break.

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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2007-39.

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Date of creation: 2007
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Handle: RePEc:zbw:ifwedp:6166
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  1. 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.
  2. 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.
  3. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
  4. Kejriwal Mohitosh, 2008. "Cointegration with Structural Breaks: An Application to the Feldstein-Horioka Puzzle," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 12(1), pages 1-39, March.
  5. Stefano Fachin, 2007. "Long-run trends in internal migrations in italy: a study in panel cointegration with dependent units," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 401-428.
  6. Westerlund, Joakim, 2005. "Testing for Panel Cointegration with Multiple Structural Breaks," Working Papers 2005:12, Lund University, Department of Economics.
  7. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  8. Frankel, Jeffrey A, 1992. "Measuring International Capital Mobility: A Review," American Economic Review, American Economic Association, vol. 82(2), pages 197-202, May.
  9. Di Iorio, Francesca & Fachin, Stefano, 2006. "Testing for breaks in cointegrated panels," MPRA Paper 3280, University Library of Munich, Germany.
  10. Westerlund, Joakim & Edgerton, David L., 2007. "A panel bootstrap cointegration test," Economics Letters, Elsevier, vol. 97(3), pages 185-190, December.
  11. 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.
  12. Bewley, R. A., 1979. "The direct estimation of the equilibrium response in a linear dynamic model," Economics Letters, Elsevier, vol. 3(4), pages 357-361.
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