On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence

Jushan Bai () and Chihwa Kao ()

No 75, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

Abstract: Most of the existing literature on panel data cointegration assumes cross-sectional independence, an assumption that is difficult to satisfy. This paper studies panel cointegration under cross-sectional dependence, which is characterized by a factor structure. We derive the limiting distribution of a fully modified estimator for the panel cointegrating coefficients. We also propose a continuous-updated fully modified (CUP-FM) estimator). Monte Carlo results show that the CUP-FM estimator has better small sample properties than the two-step FM (2S-FM) and OLS estimators.

Keywords: panel data cointegration; cross-sectional independence; cross-sectional dependence; continuous updated fully modified (CUP-FM) estimator; Monte Carlo results; two-step FM (2S-FM) estimator; OLS estimator (search for similar items in EconPapers)
JEL-codes: C13 C15 C23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2005-12
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Persistent link: http://EconPapers.repec.org/RePEc:max:cprwps:75

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