New simple tests for panel cointegration

In this paper, two new simple residual-based panel data tests are proposed for the null of no cointegration. The tests are simple because they do not require any correction for the temporal dependencies of the data. Yet they are able to accommodate individual specific short-run dynamics, individual specific intercept and trend terms, and individual specific slope parameters. The limiting distributions of the tests are derived and are shown to be free of nuisance parameters. The Monte Carlo results in this paper suggest that the asymptotic results are borne out well even in very small samples. Copyright © Taylor & Francis, Inc.

Panel cointegration tests of the Fisher hypothesis

Recent empirical studies suggest that the Fisher hypothesis, stating that inflation and nominal interest rates should cointegrate with a unit parameter on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be explained in part by the low power inherent in univariate cointegration tests and that the use of panel data should generate more powerful tests. In doing so, we propose two new panel cointegration tests, which are shown by simulation to be more powerful than other existing tests. Applying these tests to a panel of monthly data covering the period 1980:1 to 1999:12 on 14 OECD countries, we find evidence supportive of the Fisher hypothesis.

Testing for panel cointegration with multiple structural breaks

This paper proposes a Lagrange multiplier (LM) test for the null hypothesis of cointegration that allows for the possibility of multiple structural breaks in both the level and trend of a cointegrated panel regression. The test is general enough to allow for endogenous regressors, serial correlation and an unknown number of breaks that may be located at different dates for different individuals. We derive the limiting distribution of the test and conduct a small Monte Carlo study to investigate its finite sample properties. In our empirical application to the solvency of the current account, we find evidence of cointegration between saving and investment once a level break is accommodated. © Blackwell Publishing Ltd, 2006.

Panel cointegration and the monetary exchange rate model

This paper re-examines the validity of the monetary exchange rate model during the post-Bretton Woods era for 18 OECD countries. Our analysis simultaneously considers the presence of both cross-sectional dependence and multiple structural breaks, which have not received much attention in previous studies of the monetary model. The empirical results indicate that the monetary model emerges only when the presence of structural breaks and cross-country dependence has been taken into account. Evidence is also provided suggesting that the breaks in the monetary model can be derived from the underlying purchasing power parity relation. © 2008 Elsevier B.V. All rights reserved.

Mixed signals among tests for panel cointegration

In this paper, we study the effect that different serial correlation adjustment methods can have on panel cointegration testing. As an example, we consider the very popular tests developed by Pedroni [Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics 61, 653670., Pedroni, P. (2004). Panel cointegration: asymptotic and finite sample properties of pooled time series tests with an application to the PPP hypothesis. Econometric Theory 20, 597-625.]. Results based on both simulated and real data suggest that different adjustment methods can lead to significant variations in test outcome, and thus also in the conclusions. © 2007 Elsevier B.V. All rights reserved.

Human capital and innovation: evidence from panel cointegration tests

Panel cointegration techniques applied to pooled data for 27 economies for the period 1960-2000 indicate that: i) government spending in education and innovation indicators are cointegrated; ii) education hierarchy is relevant when explaining innovation; and iii) the relation between education and innovation can be obtained after an accommodation of a level structural break.

Output and labor productivity in organized manufacturing: a panel cointegration analysis for India

One of the policy puzzles faced in India during the last two and half decades has been the weak association between output and labor markets, particularly in the manufacturing sector. In this research, we investigate the long-run relationship between output, labor productivity and real wages in the case of organized manufacturing. We adjust the measure of labor productivity incorporating bottlenecks, such as lack of infrastructure, access to external finance, and labor regulations, which all may influence labor market outcomes. Using panel data from seventeen manufacturing industries, we establish long-run dynamics for the output-labor productivity-real wages series over a period of nearly three decades. We employ recently developed panel unit root and cointegration tests for cross-sectional dependence to incorporate heterogeneity across industries. Long-run elasticities are generally found to be low for labor productivity compared to real wages due to the changes in manufacturing output. There are variations across industries within the manufacturing sector for the effects of the labor market on manufacturing output. In some industries, lower wages are associated with higher output, and the reason for the positive relationship in other industries could be due to workers' bargaining power.

Panel data, cointegration, causality and Wagner's law : empirical evidence from Chinese provinces

This paper tests Wagner's law of increasing state activity using panels of Chinese provinces. The paper's main methodological contribution is in that we employ for the first time in the literature on Wagner's law a panel unit root, panel cointegration and Granger causality testing approach. Overall, we find mixed evidence in support of Wagner's law for China's central and western provinces, but no support for Wagner's law for the full panel of provinces or for the panel of China's eastern provinces.

A panel bootstrap cointegration test

This paper proposes a bootstrap test for the null hypothesis of cointegration in panel data. The test is general enough to allow for dependence both within and between the cross-sectional units, and is shown to work well in small samples. © 2007 Elsevier B.V. All rights reserved.

Reducing the size distortions of the panel LM test for cointegration

This paper proposes a simple procedure to reduce the size distortions of the panel LM test for cointegration. The new procedure is based on first splitting the sample into even and odd numbered observations, and to employ the panel LM test to each subsample. The two tests are then combined using the Bonferroni principle as suggested by Choi [Choi, I., 2004, Improving the empirical size of the KPSS Test of stationarity, unpublished manuscript, Department of Economics, Hong Kong University of Science and Technology]. The Monte Carlo evidence suggests that this procedure can lead to substantial reduction in size distortions when the equilibrium errors are autoregressive. © 2005 Elsevier B.V. All rights reserved.

A panel CUSUM test of the null of cointegration

This paper proposes a simple residual-based panel CUSUM test of the null hypothesis of cointegration. The test has a limiting normal distribution that is free of nuisance parameters, it is robust to heteroskedasticity and it allows for mixtures of cointegrated and spurious alternatives. Our Monte Carlo results suggest that the test has small-size distortions and reasonable power. In our empirical application to international R&D spillovers, we present evidence suggesting that total factor productivity is heterogeneously cointegrated with foreign and domestic R&D capital stocks. © Blackwell Publishing Ltd, 2005.

Error-correction-based cointegration tests for panel data

This article describes a new Stata command called xtwest, which implements the four error-correction-based panel cointegration tests developed by Westerlund (2007). The tests are general enough to allow for a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units.

Sostenibilidad fiscal: una aproximación con datos panel para 8 países Latinoaméricanos

Este documento examina la hipótesis de sostenibilidad fiscal para 8 países de Latinoamérica. A partir de un modelo de datos panel, se determina si los ingresos y gasto primario de los Gobiernos entre 1960 - 2009 están cointegrados, es decir, si son sostenibles a largo plazo. Para esto, se utilizaron pruebas de raíz unitaria y cointegración de segunda generación con datos panel macroeconómicos, lo que permite tener en cuenta la dependencia cruzada entre los países, así como los posibles quiebres estructurales en la relación que estén determinados de manera endógena; en particular, se usan la prueba de estacionariedad de Hadri y Rao (2008) y la prueba de cointegración de Westerlund (2006). Como resultado del análisis se encontró evidencia empírica de que en el período bajo estudio el déficit primario en los 8 países latinoamericanos es sostenible pero en sentido débil.

Does environmental quality influence health expenditures? empirical evidence from a panel of selected OECD countries

In this paper we examine the role of environmental quality in determining per capita health expenditures. We take a panel cointegration approach in order to explore the possibility of estimating both short-run and long-run impacts of environmental quality. Our empirical analysis is based on eight OECD countries, namely Austria, Denmark, Iceland, Ireland, Norway, Spain, Switzerland, and the UK for the period 1980–1999. We find that per capita health expenditure, per capita income, carbon monoxide emissions, sulphur oxide emissions and nitrogen oxide emissions are panel cointegrated. While short-run elasticities reveal that income and carbon monoxide emissions exert a statistically significant positive effect on health expenditures, in the long-run in addition to income and carbon monoxide, we find that sulphur oxide emissions have a statistically significant positive impact on health expenditures.

A panel data analysis of the military expenditure-external debt nexus : evidence from six middle eastern countries

While a number of studies examine the nexus between military expenditure and economic growth, little consideration has been give to the effect of military expenditure on external debt. This article examines the impact of military expenditure and income on external debt for a panel of six Middle Eastern countries - Oman, Syria, Yemen, Bahrain, Iran, and Jordan - over the period 1988 to 2002. The Middle East represents an interesting study of the effect of military expenditure on external debt because it has one of the highest rates of arms imports in the world and it is one of the most indebted regions in the world. The study first establishes whether there is a long-run relationship between military expenditure, income, and external debt in the six countries using a panel unit root and panel cointegration framework and then proceeds to estimate the long-run and short-run effects of military expenditure and income on external debt. The study finds that external debt is elastic with respect to military expenditure in the long run and inelastic with respect to military expenditure in the short run. For the panel of six Middle Eastern countries, in the long run a 1% increase in military expenditure results in between a 1.1 % and 1.6% increase in external debt, while a 1% increase in income reduces external debt by between 0.6% and 0.8%, depending on the specific estimator employed. In the short run, a 1% increase in military expenditure increases external debt by 0.2%, while the effect of income on external debt is statistically insignificant.