CPR Working Paper Series No. 75
On the Estimation and Inference of a Panel
Cointegration Model with Cross-Sectional Dependence
Jushan
Bai and Chihwa Kao
December 2005
Abstract:
Most of the existing literature on panel data cointegration assumes
crosssectional
independence, an assumption that is difficult to satisfy. This paper
studies panel cointegration under cross-sectional dependence, which is
characterized
by a factor structure. We derive the limiting distribution of a fully
modified
estimator for the panel cointegrating coefficients. We also propose a
continuousupdated
fully modified (CUP-FM) estimator. Monte Carlo results show that the
CUP-FM estimator has better small sample properties than the two-step FM
(2S-FM) and OLS estimators.
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