Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data

IGIER Working Paper No. 170

43 Pages Posted: 1 Mar 2001

See all articles by Anindya Banerjee

Anindya Banerjee

European University Institute - Department of Economics; University of Oxford - Department of Economics

Massimiliano Giuseppe Marcellino

European University Institute; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Chiara Osbat

European Central Bank (ECB)

Date Written: July 2000

Abstract

We show how the use of panel data methods such as those proposed in single equations by Kao (1999) and Pedroni (1999) or in systems by Larsson and Lyhagen (1999) to investigate economic hypotheses such as purchasing power parity or the term structure of interest rates may be affected by the existence of cross-unit cointegrating relations. The existing literature assumes that such relations, that tie the units of the panel together, are not present. Using empirical examples from a panel of OECD countries we show that this assumption is very likely to be violated. Simulations of the properties of panel cointegration tests in the presence of cross-unit relations are then presented to demonstrate the serious cost of assuming away such relations. Some fixes are proposed as a way of dealing with these more general scenarios.

JEL Classification: C12, C33, C52

Suggested Citation

Banerjee, Anindya and Marcellino, Massimiliano and Osbat, Chiara, Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data (July 2000). IGIER Working Paper No. 170, Available at SSRN: https://ssrn.com/abstract=261650 or http://dx.doi.org/10.2139/ssrn.261650

Anindya Banerjee

European University Institute - Department of Economics ( email )

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University of Oxford - Department of Economics ( email )

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Massimiliano Marcellino (Contact Author)

European University Institute ( email )

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Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

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