Cointegration Vector Estimation by Panel Dols and Long-Run Money Demand

26 Pages Posted: 6 Dec 2002 Last revised: 16 Apr 2023

See all articles by Nelson C. Mark

Nelson C. Mark

University of Notre Dame - Department of Economics and Econometrics; National Bureau of Economic Research (NBER)

Donggyu Sul

Independent

Date Written: December 2002

Abstract

We study the panel DOLS estimator of a homogeneous cointegration vector for a balanced panel of N individuals observed over T time periods. Allowable heterogeneity across individuals include individual-specific time trends, individual-specific fixed effects and time-specific effects. The estimator is fully parametric, computationally convenient, and more precise than the single equation estimator. For fixed N as T approaches infinity, the estimator converges to a function of Brownian motions and the Wald statistic for testing a set of linear constraints has a limiting chi-square distribution. The estimator also has a Gaussian sequential limit distribution that is obtained first by letting T go to infinity then letting N go to infinity. In a series of Monte Carlo experiments, we find that the asymptotic distribution theory provides a reasonably close approximation to the exact finite sample distribution. We use panel dynamic OLS to estimate coefficients of the long-run money demand function from a panel of 19 countries with annual observations that span from 1957 to 1996. The estimated income elasticity is 1.08 (asymptotic s.e.=0.26) and the estimated interest rate semi-elasticity is -0.02 (asymptotic s.e.=0.01).

Suggested Citation

Mark, Nelson Chung and Sul, Donggyu, Cointegration Vector Estimation by Panel Dols and Long-Run Money Demand (December 2002). NBER Working Paper No. t0287, Available at SSRN: https://ssrn.com/abstract=359301

Nelson Chung Mark (Contact Author)

University of Notre Dame - Department of Economics and Econometrics ( email )

442 Flanner
Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Donggyu Sul

Independent