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Least Squares Asymptotics in Spurious and Cointegrated Panel Regressions with Common and Idiosyncratic Stochastic Trends


  • A preliminary version of the article was presented at the Conference on Common Feature in Maastricht, at Ente ‘Luigi Einaudi’ in Rome, at ESEM2004 in Madrid and at the Econometric Seminar in Rotterdam. The authors thank conference and seminar participants, and in particular Anindya Banerjee, Christian Gengenbach, Stephane Gregoir, Christoph Hanck, Richard Paap, Franco Peracchi, Fabio Busetti and two anonymous referees for helpful comments and suggestions. The second 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 article 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.


This article makes an analytical study of the effects of the presence of both common and idiosyncratic stochastic trends on the pooled least squares estimator. The results suggest that the usual result of asymptotic normality depends critically on the absence of the common stochastic trend.