Panel cointegration with global stochastic trends |
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Authors: | Jushan Bai Chihwa Kao Serena Ng |
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Affiliation: | 1. Department of Economics, New York University, New York, NY 10003, USA;2. School of Economics and Management, Tsinghua University, Beijing, China;3. Center for Policy Research and Department of Economics, Syracuse University, Syracuse, NY 13244-1020, USA;4. Department of Economics, Columbia University, 440 W. 118 Street, New York, NY 10027, USA |
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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 (mixed) normal and permit inference to be conducted using standard test statistics. The estimators are also valid when there are mixed stationary and non-stationary factors, as well as when the factors are all stationary. |
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Keywords: | C13 C33 |
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