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 378:
Testing for common cointegrating rank in dynamic panels

Rolf Larsson and Johan Lyhagen ()

Abstract: The panel cointegration test of Larsson et al (1998) test for the maximum number of cointegrating relations in a dynamic panel given the assumption of a common cointegrating rank. This paper presents a test for this assumption. The test is based on the test statistic of Larsson et al (1998) and a new panel test based on the principal component estimator of cointegrating relations of Harris (1997). The asymptotic distribution is derived and shown to be standard normal. An extensive Monte Carlo simulation shows that the test has good small sample size and power properties. In the consumption function example in Larsson et al (1998) the assumption of common cointegrating rank amongst 23 OECD countries is shown to hold.

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

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

43 pages, April 19, 2000

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