Testing for Exogeneity in Cointegrated Panels

Lorenzo Trapani ()

Oxford Bulletin of Economics and Statistics, 2015, vol. 77, issue 4, 475-494

Abstract: type="main" xml:id="obes12072-abs-0001">

This paper proposes a test for the null that, in a cointegrated panel, the long-run correlation between the regressors and the error term is different from zero. As is well known, in such case the OLS estimator is T-consistent, whereas it is N T -consistent when there is no endogeneity. Other estimators can be employed, such as the FM-OLS, that are N T -consistent irrespective of whether exogeneity is present or not. Using the difference between the former and the latter estimator, we construct a test statistic which diverges at a rate N under the null of endogeneity, whilst it is bounded under the alternative of exogeneity, and employ a randomization approach to carry out the test. Monte Carlo evidence shows that the test has the correct size and good power.

Date: 2015
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