Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2005:12: Testing for Panel Cointegration with Multiple Structural Breaks

Joakim Westerlund ()
Additional contact information
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 an LM test for the null hypothesis of cointegration that allows for the possibility of multiple structural breaks in both the level and trend of a cointegrated panel regression. The test is general enough to allow for endogenous regressors, serial correlation and an unknown number of breaks that may be located at different dates for different individuals. We derive the limiting distribution of the test and conduct a small Monte Carlo study to investigate its finite sample properties. In our empirical application to the Feldstein-Horioka Puzzle, we find evidence of cointegration between saving and investment once a level break is accommodated.

Keywords: Panel Cointegration; Residual-Based Cointegration Test; Structural Break; Monte Carlo Simulation; Feldstein-Horioka Puzzle.

JEL-codes: C12; C32; C33; F21

35 pages, January 26, 2005

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