Likelihood-Based Cointegration Analysis in Panels of Vector Error-Correction Models

Jan Groen and Frank Kleibergen

Journal of Business & Economic Statistics, 2003, vol. 21, issue 2, 295-318

Abstract: We propose a likelihood-based framework for cointegration analysis in panels of a fixed number of vector error-correction (VEC) models. We obtain likelihood ratio statistics to test for a common cointegration rank across the individual VEC models with both heterogeneous and homogeneous cointegrating vectors. Their limiting distributions are a summation of the limiting behavior of Johansen trace statistics. We extend the asymptotic distribution theory to cover the case of an infinite cross-sectional dimension. We apply the framework to a dataset of exchange rates and appropriate monetary fundamentals. We find evidence for the validity of the monetary exchange rate model within a panel of VEC models for three major European countries, whereas the results based on individual VEC models for each of these countries separately are less supportive.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:bes:jnlbes:v:21:y:2003:i:2:p:295-318

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