On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence
Syracuse University Center for Policy Research Working Paper No. 75
33 Pages Posted: 20 Apr 2011
Date Written: December 1, 2005
Most of the existing literature on panel data cointegration assumes cross-sectional independence, an assumption that is difficult to satisfy. This paper studies panel cointegration under cross-sectional dependence, which is characterized by a factor structure. We derive the limiting distribution of a fully modified estimator for the panel cointegrating coefficients. We also propose a continuous-updated fully modified (CUP-FM) estimator. Monte Carlo results show that the CUP-FM estimator has better small sample properties than the two-step FM (2S-FM) and OLS estimators.
Keywords: panel data cointegration, cross-sectional independence, cross-sectional dependence, continuous updated fully modified (CUP-FM) estimator, Monte Carlo results, two-step FM (2S-FM) estimator, OLS estimator
JEL Classification: C13, C15, C23
Suggested Citation: Suggested Citation