Some Cautions on the Use of Panel Methods for Integrated Series of Macroeconomic Data

19 Pages Posted: 13 Dec 2004

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)

Abstract

Existing panel cointegration tests rule out cross-unit cointegrating relationships, while economic theory and empirical observation argue strongly in favour of their presence. Using an extensive set of simulation experiments, we show that both univariate and multivariate panel cointegration tests can be substantially oversized in the presence of cross-unit cointegration. We also propose a test for cross-unit cointegration that performs well in practice and can be used to decide upon the usefulness of panel methods.

Suggested Citation

Banerjee, Anindya and Marcellino, Massimiliano and Osbat, Chiara, Some Cautions on the Use of Panel Methods for Integrated Series of Macroeconomic Data. Available at SSRN: https://ssrn.com/abstract=625758

Anindya Banerjee (Contact Author)

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Massimiliano Marcellino

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Bocconi University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Chiara Osbat

European Central Bank (ECB) ( email )

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Germany
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