Panel data co-integration analysis with structural instabilities
NB: Now at 3.30pm
Spurious regression analysis in panel data when time series are cross-section dependent is analyzed in the paper. The set-up is general enough to include multiple structural breaks that can affect the deterministic component and the common factor component. We show that consistent estimation of the long-run average parameter is possible once cross-section dependence is controlled using cross-section averages in the spirit of the common correlated effects approach in Pesaran (2006). This result is used to design individual and panel cointegration test statistics that accommodate the presence of structural breaks that can induce parameter instabilities on the deterministic component, the cointegration vector and the common factor loadings.
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