Panel Cointegration Tests of the Fisher Effect

Most empirical evidence suggest that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account.econometrics;

The Tax Spending Nexus: Evidence from a Panel of US State-Local Governments

We re-examine the tax-spending nexus using, for the first time, a panel of fifty US state-local government units over the period 1963-97 and panel techniques that allow for cross-sectional dependence. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis at the one percent level of significance. One implication of this finding is that the size of the government at the state-local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits.tax-spend, state and local government, public finance, and panel cointegration.

Is there Really a Unit Root in the Inflation Rate? More Evidence from Panel Data Models

Time series unit root evidence suggests that inflation is nonstationary. By contrast, when using more powerful panel unit root tests, Culver and Papell (1997) find that inflation is stationary. In this paper, we test the robustness of this result by applying a battery of recent panel unit root tests. The results suggest that the stationarity of inflation holds even after controlling for crosssectional dependence and structural change.Unit Root; Inflation; Cross-Sectional Dependence; Structural Change

Mixed Signals Among Tests for Panel Cointegration

In this paper, we study the effect that different serial correlation adjustment methods can have on panel cointegration testing. As an example, we consider the very popular tests developed by Pedroni (1999, 2004). Results based on both simulated and real data suggest that different adjustment methods can lead to significant variations in test outcome, and thus also in the conclusions.Panel Data; Cointegration Testing; Parametric and Semiparametric Methods

Panel Cointegration and the Monetary Exchange Rate Model

This paper re-examines the validity of the monetary exchange rate model during the post-Bretton Woods era for 18 OECD countries. Our analysis simultaneously considers the presence of both cross-sectional dependence and multiple structural breaks, which have not received much attention in previous studies of the monetary model. The empirical results indicate that the monetary model emerges only when the presence of structural breaks and cross-country dependence has been taken into account. Evidence is also provided suggesting that the breaks in the monetary model can be derived from the underlying purchasing power parity relation.

Cross sectional averages or principal components?

In spite of the increased use of factor-augmented regressions in recent years, little is knownregarding the relative merits of the two main approaches to estimation and inference, namely, thecross-sectional average and principal components estimators. As a response to this, the currentpaper offers an in-dept theoretical analysis of the issue.econometrics;

The Present Value Model, Farmland Prices and Structural Breaks

We review the constant discount rate present value model of farmland prices using non-stationary panel data analysis. We use panel unit root and cointegration analysis to test if the present value model holds for a sample of 31 U.S. States covering the period 1960-2000. Preliminary results indicate that farmland prices and cash rents are non-stationary and non-cointegrated assuming a constant discount rate. The absence of cointegration may be due to the presence of a regime shift representing a time-varying discount rate. To accommodate this possibility, we introduce new panel cointegration tests that allow for unknown regime shifts in the cointegration relationship. The results suggest that the cointegration hypothesis cannot be rejected if there is a regime shift. Thus, while the present value model of farmland prices must be rejected when the discount rate is presumed constant, it cannot be rejected once we allow for regime shifts representing a time-varying discount rate.farmland prices, present value model, non-stationary panel data analysis, regime shift, Q24, Land Economics/Use, C22, C23, G12,

Error-correction-based cointegration tests for panel data

This article describes a new Stata command called xtwest, which implements the four error-correction-based panel cointegration tests developed by Westerlund (2007). The tests are general enough to allow for a large degree of heterogeneity, both in the long-run cointegrating relationship and in the short-run dynamics, and dependence within as well as across the cross-sectional units