Likelihood‐based cointegration tests in heterogeneous panels

Abstract

This paper presents a maximum likelihood panel test of the cointegrating rank in heterogeneous panel models based on the mean of the individual rank trace statistics. The existence of the first two moments of the asymptotic distribution of the individual trace statistic is established. Based on this, the asymptotic distribution of the test statistic is shown to be normal. The small-sample size and power properties are investigated using Monte Carlo simulations. An empirical example for a consumption model including consumption, income and inflation is estimated for 23 OECD countries over the period 1960-1994. The results indicate that two cointegrating relations exist in the system: one containing consumption and income and one inflation only.

Does Financial Structure Matter?

“…Larsson et al (2001) discuss the computations of these panel estimates under the Johansen approach and Pedroni (2001) derives them for the FMOLS. Essentially, the "between-dimension" panel parameters are the mean of the country-specific parameters.…”

The long-run determinants of fertility: one century of demographic change 1900–1999

“…Another drawback of single-equation, residual-based (panel) cointegration tests is that they are generally not invariant to the normalization of the cointegrating regression, and, moreover, such tests are unable to identify more than one cointegrating relationship in systems with more than two variables. Therefore, we also use the Larsson et al (2001) procedure, which is based on Johansen's (1988) where y it is a p × 1 vector of endogenous variables (y it = [ f ert it , mort it , log(gdp it ] ); p is the number of variables) and t is the long-run matrix of order p × p. If i is of reduced rank, r i < p, it is possible to let i = α i β i , where β i is a p × r i matrix, the r i columns of which represent the cointegrating vectors, and α i is a p × r i matrix whose p rows represent the error correction coefficients. The null hypothesis is that all of the N countries in the panel have a common cointegrating rank, i.e.…”

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“…For each conditional ECM, insignificant short-run dynamics were eliminated. For the Larsson et al (2001) technique, we used one lag.…”