Abstract
AbstractStability tests for cointegrating coefficients are known to have very low power with small to medium sample sizes. In this paper we propose to solve this problem by extending the tests to dependent cointegrated panels through the stationary bootstrap. Simulation evidence shows that the proposed panel tests improve considerably on asymptotic tests applied to individual series. As an empirical illustration we examined investment and saving for a panel of European countries over the 1960-2002 period. While the individual stability tests, contrary to expectations and graphical evidence, in almost all cases do not reject the null of stability, the bootstrap panel tests lead to the more plausible conclusion that the long-run relationship between these two variables is likely to have undergone a break.
Highlights
The analysis of cointegration in non-stationary panels has been recently rapidly expanding in two main directions
The second direction follows steps already taken by the cointegration literature in the early ’90’s, tackling the issues of testing (i) cointegration allowing for breaks and (ii) the stability of a cointegrating relationship. In this stream of the literature, the first problem seems to have received more attention (e.g., Banerjee and Carrion-i-Silvestre, 2004 and 2006, Gutierrez, 2005, Westerlund, 2006) than the second. This is somehow surprising, as stability tests with unknown break points may have very low power with even medium sample sizes
In this paper we tackle the dependence issue from the outset, proposing a panel generalisation of Hansen (1992) stability tests based on the stationary bootstrap which is completely robust to cross-section dependence, and may be helpful for actual empirical work
Summary
The analysis of cointegration in non-stationary panels has been recently rapidly expanding in two main directions. The second direction follows steps already taken by the cointegration literature in the early ’90’s, tackling the issues of testing (i) cointegration allowing for breaks and (ii) the stability of a cointegrating relationship In this stream of the literature, the first problem seems to have received more attention (e.g., Banerjee and Carrion-i-Silvestre, 2004 and 2006, Gutierrez, 2005, Westerlund, 2006) than the second (to the best of our knowledge, only Emerson and Kao, 2001, 2005, for trend regressions, Kao and Chiang, 2000, for homogenous panel regressions). It is of some interest to test if breaks place
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