Cointegration in Panel Data with Breaks and Cross-Section Dependence

56 Pages Posted: 23 Mar 2006

See all articles by Anindya Banerjee

Anindya Banerjee

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

Josep Lluís Carrion-i-Silvestre

University of Barcelona - Department of Econometrics

Date Written: February 2006

Abstract

The power of standard panel cointegration statistics may be affected by misspecification errors if proper account is not taken of the presence of structural breaks in the data. We propose modifications to allow for one structural break when testing the null hypothesis of no cointegration that retain good properties in terms of empirical size and power. Response surfaces to approximate the finite sample moments that are required to implement the statistics are provided. Since panel cointegration statistics rely on the assumption of cross-section independence, a generalisation of the tests to the common factor framework is carried out in order to allow for dependence among the units of the panel.

Keywords: Panel cointegration, structural break, common factors, cross-section dependence

JEL Classification: C12, C22

Suggested Citation

Banerjee, Anindya and Carrion-i-Silvestre, Josep Lluís, Cointegration in Panel Data with Breaks and Cross-Section Dependence (February 2006). ECB Working Paper No. 591, Available at SSRN: https://ssrn.com/abstract=885322 or http://dx.doi.org/10.2139/ssrn.885322

Anindya Banerjee (Contact Author)

European University Institute - Department of Economics ( email )

Villa San Paolo
Via della Piazzuola 43
50133 Florence
Italy
+39 055 4685 356 (Phone)
+39 055 4685 202 (Fax)

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom
+44 1865 279 700 (Phone)
+44 1865 279 687 (Fax)

Josep Lluís Carrion-i-Silvestre

University of Barcelona - Department of Econometrics ( email )

Av. Diagonal 690
Barcelona, E-08034
Spain