Cross-sectional correlation robust tests for panel cointegration
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Date
2006-12-15T11:28:18Z
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Abstract
We use meta analytic combination procedures to develop new tests for panel
cointegration. The main idea consists in combining p-values from time series cointegration
tests on the different units of the panel. The tests are robust to heterogeneity
as well as to cross-sectional dependence between the different units of the
panel. To achieve the latter, we employ a sieve bootstrap procedure with joint resampling
of the residuals of the different units. A simulation study shows that the
suggested bootstrap tests can have substantially smaller error-in-rejection probabilities
than tests ignoring the presence of cross-sectional dependence while preserving
high power. We apply the tests to a panel of Post-Bretton Woods data to test for
weak Purchasing Power Parity (PPP).
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Keywords
Cross-sectional dependence, Panel cointegration tests, Purchasing Power Parity (PPP), Sieve bootstrap