Panel Cointegration with Global Stochastic Trends

Author(s)/Creator(s)

Jushan Bai, New York University, Department of Economics ; Tsinghua University, School of Economics and ManagementFollow
Chihwa Kao, Syracuse University, Maxwell School, Center for Policy Research.Follow
Serena Ng, University of Michigan, Department of EconomicsFollow

Description/Abstract

This paper studies estimation of panel cointegration models with cross-sectional dependence generated by unobserved global stochastic trends. The standard least squares estimator is, in general, inconsistent owing to the spuriousness induced by the unobservable I(1) trends. We propose two iterative procedures that jointly estimate the slope parameters and the stochastic trends. The resulting estimators are referred to respectively as CupBC (continuously updated and bias-corrected) and the CupFM (continuously updated and fully modified) estimators. We establish their consistency and derive their limiting distributions. Both are asymptotically unbiased and asymptotically normal and permit inference to be conducted using standard test statistics. The estimates are also valid when there are mixed stationary and non-stationary factors, as well as when the factors are all stationary.

Document Type

Working Paper

Date

2007

Keywords

panel cointegration models, cross-sectional dependence, global stochastic trends

Language

English

Series

Working Papers Series

Disciplines

Econometrics

Additional Information

Harvest from RePEc at http://repec.org

Recommended Citation

Bai, Jushan; Kao, Chihwa; and Ng, Serena, "Panel Cointegration with Global Stochastic Trends" (2007). Center for Policy Research. 75.
https://surface.syr.edu/cpr/75

Source

Metadata from RePEc