Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2005:11: Testing for Error Correction in Panel Data

Joakim Westerlund ()
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Joakim Westerlund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: This paper proposes four new tests for the null hypothesis of no cointegration in panel data that are based on the error correction parameter in a conditional error correction model. The limit distribution of the test statistics are derived and critical values are provided. Our Monte Carlo results suggest that the tests have reasonable size properties and good power relative to other popular residual-based cointegration tests. These differences arises because latter imposes a possibly invalid common factor restriction. In our empirical application, we present evidence suggesting that international health care expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for.

Keywords: Panel Cointegration Test; Monte Carlo Simulation; Common Factor Restriction; International Health Care Expenditures.

JEL-codes: C12; C32; C33; O30

31 pages, January 26, 2005

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