Discussion Paper

No. 2007-39 | August 30, 2007
Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle

Abstract

Stability tests for cointegrating coefficients are known to have very low power with small to medium sample sizes. In this paper we propose to solve this problem by extending the tests to dependent cointegrated panels through the stationary bootstrap. Simulation evidence shows that the proposed panel tests improve considerably on asymptotic tests applied to individual series. As an empirical illustration we examined investment and saving for a panel of 14 European countries over the 1960-2002 period. While the individual stability tests, contrary to expectations and graphical evidence, in almost all cases do not reject the null of stability, the bootstrap panel tests lead to the more plausible conclusion that the long-run relationship between these two variables is likely to have undergone a break.

JEL Classification

C15 C23

Cite As

Francesca Di Iorio and Stefano Fachin (2007). Testing for Breaks in Cointegrated Panels - with an Application to the Feldstein-Horioka Puzzle. Economics Discussion Papers, No 2007-39, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2007-39

Assessment



Comments and Questions


Joakim Westerlund - Invited Reader Comment
September 26, 2007 - 12:46

see attached file


Stefano FACHIN - Reply to Westerlund
October 19, 2007 - 10:31

We would to like thank Joakim Westerlund for a very detailed and helpful comment. We tried to answer in the attached reply.


Anonymous - Referee Report
October 05, 2007 - 09:56

see attached file


Stefano FACHIN - Reply to Referee
October 19, 2007 - 10:32

We would to like thank the Referee for a very detailed and helpful comment. We tried to answer in the attached reply.


Anonymous - Invited Reader Comment
November 08, 2007 - 10:56

see attached file


Stefano FACHIN - Reply to the invited comment of november, 8
November 13, 2007 - 10:29

Thanks also to this reader. We tried to answer in the attached reply.


Stefano Fachin - Revision of paper
November 20, 2007 - 11:59

see attached file