Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 250: Likelihood-Based Cointegration Tests in Heterogeneous Panels

Rolf Larsson , Johan Lyhagen () and Mickael Löthgren ()
Additional contact information
Rolf Larsson: Department of Statistics, Postal: Stockholm University, 106 91 Stockholm, Sweden
Johan Lyhagen: Department of Information Science, Division of Statistics, Uppsala University, Postal: P.O. 513, SE-751 20 Uppsala, Sweden
Mickael Löthgren: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

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.

JEL-codes: C12; C13; C15; C22; C23; D12

27 pages, First version: August 26, 1998. Revised: August 27, 1998.

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