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Testing for panel cointegration in an error-correction framework with an application to the Fisher hypothesis
Jönköping University, Jönköping International Business School, JIBS, Statistics. HUI Research, Stockholm, Sweden.ORCID iD: 0000-0003-3144-2218
Jönköping University, Jönköping International Business School, JIBS, Statistics. HUI Research, Stockholm, Sweden.
Jönköping University, Jönköping International Business School, JIBS, Statistics. HUI Research, Stockholm, Sweden; Department of Economics and Statistics, Linnaeus University, Sweden.ORCID iD: 0000-0002-3416-5896
2017 (English)In: Communications in statistics. Simulation and computation, ISSN 0361-0918, E-ISSN 1532-4141, Vol. 46, no 3, 1735-1745 p.Article in journal (Refereed) Published
Abstract [en]

In this article, three innovative panel error-correction model (PECM) tests are proposed. These tests are based on the multivariate versions of the Wald (W), likelihood ratio (LR), and Lagrange multiplier (LM) tests. Using Monte Carlo simulations, the size and power of the tests are investigated when the error terms exhibit both cross-sectional dependence and independence. We find that the LM test is the best option when the error terms follow independent white-noise processes. However, in the more empirically relevant case of cross-sectional dependence, we conclude that the W test is the optimal choice. In contrast to previous studies, our method is general and does not rely on the strict assumption that a common factor causes the cross-sectional dependency. In an empirical application, our method is also demonstrated in terms of the Fisher effect—a hypothesis about the existence of which there is still no clear consensus. Based on our sample of the five Nordic countries we utilize our powerful test and discover evidence which, in contrast to most previous research, confirms the Fisher effect.

Place, publisher, year, edition, pages
Taylor & Francis, 2017. Vol. 46, no 3, 1735-1745 p.
Keyword [en]
Error correction, Fisher hypothesis, Multivariate tests, Panel cointegration, Size and power
National Category
Social Sciences
Identifiers
URN: urn:nbn:se:hj:diva-25174DOI: 10.1080/03610918.2015.1011332ISI: 000398114600005Scopus ID: 2-s2.0-84995388285OAI: oai:DiVA.org:hj-25174DiVA: diva2:765379
Available from: 2014-11-23 Created: 2014-11-23 Last updated: 2017-06-08Bibliographically approved

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