Dealing with unobservable common trends in small samples: a panel cointegration approach

Francesca Di Iorio and Stefano Fachin

No 2014/5, DSS Empirical Economics and Econometrics Working Papers Series from Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome

Abstract: Non stationary panel models allowing for unobservable common trends have recently become very popular. However, standard methods, which are based on factor extraction or models augmented with cross-section averages, require large sample sizes, not always available in practice. In these cases we propose the simple and robust alternative of augmenting the panel regres- sion with common time dummies. The underlying assumption of additive e¤ects can be tested by means of a panel cointegration test, with no need of estimating a general interactive e¤ects model. An application to modelling labour productivity growth in the four major European economies (France, Germany, Italy and UK) illustrates the method.

Keywords: Common trends; Panel cointegration; TFP. (search for similar items in EconPapers)
JEL-codes: C15 C23 E2 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2014-11
New Economics Papers: this item is included in nep-ecm, nep-eff, nep-ets, nep-mac and nep-ore
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