Scandinavian Working Papers in Economics
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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 250:
Likelihood-Based Cointegration Tests in Heterogeneous Panels

Rolf Larsson, Johan Lyhagen () and Mickael Löthgren ()

Abstract: This paper presents a likelihood-based panel test of 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.

Keywords: Cointegration; Consumption; Monte Carlo simulations; Panel data; Rank test.; (follow links to similar papers)

JEL-Codes: C12; C13; C15; C22; C23; D12; (follow links to similar papers)

27 pages, August 26, 1998, Revised August 27, 1998

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This paper is published as:
Larsson, Rolf, Johan Lyhagen and Mickael Löthgren, (2001), 'Likelihood-Based Cointegration Tests in Heterogeneous Panels', Econometrics Journal, Vol. 4, pages 109-142

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