Scandinavian Working Papers in Economics

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

No 378: Testing for common cointegrating rank in dynamic panels

Rolf Larsson and Johan Lyhagen ()
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Rolf Larsson: Department of Statistics, Stockholm University, Postal: S-106 91 Stockholm, Sweden
Johan Lyhagen: Dept. of Economic Statistics, Stockholm School of Economics, Postal: P.O. Box 6501, S-113 83 Stockholm, Sweden

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.

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

43 pages, April 19, 2000

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