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Testing for Exogeneity in Cointegrated Panels
Author(s) -
Trapani Lorenzo
Publication year - 2015
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12072
Subject(s) - endogeneity , estimator , econometrics , test statistic , hausman test , null hypothesis , mathematics , statistics , cointegration , monte carlo method , statistical hypothesis testing , economics , panel data , fixed effects model
This paper proposes a test for the null that, in a cointegrated panel, the long‐run correlation between the regressors and the error term is different from zero. As is well known, in such case the OLS estimator is T ‐consistent, whereas it isN T ‐consistent when there is no endogeneity. Other estimators can be employed, such as the FM‐OLS, that areN T ‐consistent irrespective of whether exogeneity is present or not. Using the difference between the former and the latter estimator, we construct a test statistic which diverges at a rate N under the null of endogeneity, whilst it is bounded under the alternative of exogeneity, and employ a randomization approach to carry out the test. Monte Carlo evidence shows that the test has the correct size and good power.