Testing Weak Exogeneity in Cointegrated Panels

Abstract

For reasons 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 T → ∞ and then letting N → ∞. We evaluate the accuracy of the asymptotic approximation in finite samples via simulation experiments. Finally, as an empirical illustration, we test weak exogeneity of disposable income and wealth in aggregate consumption. JEL Codes: C23, C32.

Testing for Exogeneity in Cointegrated Panels

“…a VECM specification), and then by formulating the null hypothesis of exogeneity based on such model -see e.g. the contributions by Gengenbach and Urbain (2011) and Moral-Benito and Serven (2013;and the references therein). Such approaches are sensitive to the correct specification of the VECM, and a less parametric testing approach such as the one proposed in this paper could be advantageous.…”