Non stationary panel models allowing for unobservable common trends have recently become very popular. However, standard methods based on factor extraction or models augmented with cross-section averages require large sample sizes, rarely available in practice. In these cases we propose the simple and robust alternative of augmenting the panel regression with common time dummies. The underlying assumption of additive effects can be tested by means of a panel cointegration test, with no need of estimating a general interactive effects model. An application to labour productivity in the four major European economies (France, Germany, Italy and UK) illustrates the method.

Dealing with unobservable common trends in small samples: a panel cointegration approach

DI IORIO, FRANCESCA;
2015

Abstract

Non stationary panel models allowing for unobservable common trends have recently become very popular. However, standard methods based on factor extraction or models augmented with cross-section averages require large sample sizes, rarely available in practice. In these cases we propose the simple and robust alternative of augmenting the panel regression with common time dummies. The underlying assumption of additive effects can be tested by means of a panel cointegration test, with no need of estimating a general interactive effects model. An application to labour productivity in the four major European economies (France, Germany, Italy and UK) illustrates the method.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11588/603999
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