A Common-Correlated Effects Approach to Testing Slope Homogeneity in Cointegrated Panels

• Activity Number: 607
• Type: Contributed
• Date/Time: Thursday, August 7, 2014 : 8:30 AM to 10:20 AM
• Sponsor: Business and Economic Statistics Section
• Author(s): Mohitosh Kejriwal*+
• Companies: Purdue University
• Keywords: slope homogeneity ; cointegration ; common-correlated effects ; cross-section dependence

Abstract

This paper proposes new tests for slope homogeneity in cointegrated panels with cross-section dependence. We employ the common-correlated effects approach of Pesaran (Econometrica, 2006) to account for cross-section dependence through the inclusion of cross-sectional averages of the model variables. The test statistics we propose are modified versions of those that have been proposed under the assumption of cross-section independence. The limit distributions of the new tests are derived and critical values are tabulated. An extensive set of Monte Carlo simulations is performed both to evaluate the merits of our proposed procedures as well as compare their performance to existing ones. Empirical examples are used to illustrate the use of the suggested methods.