Testing for Error Correction in Panel Data*

Authors


  • *

    Previous versions of this paper were presented at the 13th International Conference on Panel Data in Cambridge and at a seminar at Lund University. The author would like to thank conference and seminar participants, and in particular Anindya Banerjee, David Edgerton, Rolf Larsson, Johan Lyhagen, Peter Pedroni, Jean-Pierre Urbain, and two anonymous referees for many valuable comments and suggestions. The author would also like to thank the Maastricht Research School of Economics of Technology and Organizations for its hospitality during a visit at the Department of Quantitative Economics at the University of Maastricht, where a part of this paper was written. Thanks are also due to the Jan Wallander and Tom Hedelius Foundation for financial support under research grant number W2006-0068:1. The usual disclaimer applies.

Abstract

This paper proposes new error correction-based cointegration tests for panel data. The limiting distributions of the tests are derived and critical values provided. Our simulation results suggest that the tests have good small-sample properties with small size distortions and high power relative to other popular residual-based panel cointegration tests. In our empirical application, we present evidence suggesting that international healthcare expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for.

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