Modelling and Testing for Structural Changes in Panel Cointegration Models with Common and Idiosyncratic Stochastic Trend

In this paper, we propose an estimation and testing framework for parameter instability in cointegrated panel regressions with common and idiosyncratic trends. We develop tests for structural change for the slope parameters under the null hypothesis of no structural break against the alternative hypothesis of (at least) one common change point, which is possibly unknown. The limiting distributions of the proposed test statistics are derived. Monte Carlo simulations examine size and power of the proposed tests. We are grateful for discussions with Robert De Jong, Long-Fei Lee, Zongwu Cai, and Yupin Hu. We would also like to thank participants in the International Conferences on "Common Features in London" (Cass, 16-17 December 2004), 2006 New York Econometrics Camp and Breaks and Persistence in Econometrics (Cass, 11-12 December 2006), and econometrics seminars at Ohio State University and Academia Sinica for helpful comments. Part of this work was done while Chihwa Kao was visiting the Centre for Econometric Analysis at Cass (CEA@Cass). Financial support from City University 2005 Pump Priming Fund and CEA@Cass is gratefully acknowledged. Lorenzo Trapani acknowledges financial support from Cass Business School under the RAE Development Fund Scheme.