Testing Weak Exogeneity in Cointegrated Panels

23 Pages Posted: 20 Apr 2016

See all articles by Enrique Moral-Benito

Enrique Moral-Benito

Banco de España; Universidad Carlos III de Madrid

Luis Servén

World Bank - Development Research Group (DECRG)

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Date Written: September 1, 2014

Abstract

For reason of empirical tractability, analysis of cointegrated economic time series is often developed in a partial setting, in which a subset of variables is explicitly modeled conditional on the rest. This approach yields valid inference only if the conditioning variables are weakly exogenous for the parameters of interest. This paper proposes a new test of weak exogeneity in panel cointegration models. The test has a limiting Gumbel distribution that is obtained by first letting the time dimension of the panel go to infinity and then letting its cross-sectional dimension go to infinity.The paper evaluates the accuracy of the asymptotic approximation in finite samples via simulation experiments. Finally, as an empirical illustration, the paper reports tests of weak exogeneity of disposable income and wealth in an aggregate consumption equation.

Keywords: Economic Growth, Consumption, Fiscal & Monetary Policy, Industrial Economics, Economic Theory & Research

Suggested Citation

Moral-Benito, Enrique and Servén, Luis, Testing Weak Exogeneity in Cointegrated Panels (September 1, 2014). World Bank Policy Research Working Paper No. 7045. Available at SSRN: https://ssrn.com/abstract=2500587

Enrique Moral-Benito (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Luis Servén

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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