Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle

29 Pages Posted: 29 Nov 2010

See all articles by Francesca Di Iorio

Francesca Di Iorio

Istituto Nazionale di Statistica

Stefano Fachin

University of Rome I

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

Abstract

Stability tests for cointegrating coefficients are known to have very low power with small to medium sample sizes. In this paper we propose to solve this problem by extending the tests to dependent cointegrated panels through the stationary bootstrap. Simulation evidence shows that the proposed panel tests improve considerably on asymptotic tests applied to individual series. As an empirical illustration we examined investment and saving for a panel of 14 European countries over the 1960-2002 period. While the individual stability tests, contrary to expectations and graphical evidence, in almost all cases do not reject the null of stability, the bootstrap panel tests lead to the more plausible conclusion that the long-run relationship between these two variables is likely to have undergone a break.

Keywords: Panel cointegration, stationary bootstrap, parameter stability tests, FM-OLS

JEL Classification: C23, C15

Suggested Citation

Di Iorio, Francesca and Fachin, Stefano, Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle (2007). Economics Discussion Paper No. 2007-39, Available at SSRN: https://ssrn.com/abstract=1716662 or http://dx.doi.org/10.2139/ssrn.1716662

Francesca Di Iorio (Contact Author)

Istituto Nazionale di Statistica ( email )

ISTAT
Via C. Balbo 16
I-00184 Roma
Italy

Stefano Fachin

University of Rome I ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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