Publication Type

Journal Article

Version

submittedVersion

Publication Date

6-2020

Abstract

We consider a panel cointegration model with latent group structures that allows for heterogeneous long-run relationships across groups. We extend Su, Shi, and Phillips (2016, Econometrica 84(6), 2215-2264) classifier-Lasso (C-Lasso) method to the nonstationary panels and allow for the presence of endogeneity in both the stationary and nonstationary regressors in the model. In addition, we allow the dimension of the stationary regressors to diverge with the sample size. We show that we can identify the individuals' group membership and estimate the group-specific long-run cointegrated relationships simultaneously. We demonstrate the desirable property of uniform classification consistency and the oracle properties of both the C-Lasso estimators and their post-Lasso versions. The special case of dynamic penalized least squares is also studied. Simulations show superb finite sample performance in both classification and estimation. In an empirical application, we study the potential heterogeneous behavior in testing the validity of long-run purchasing power parity (PPP) hypothesis in the post-Bretton Woods period from 1975-2014 covering 99 countries. We identify two groups in the period 1975-1998 and three groups in the period 1999-2014. The results confirm that at least some countries favor the long-run PPP hypothesis in the post-Bretton Woods period.

Keywords

Classifier Lasso, Dynamic OLS, Heterogeneity, Latent group structure, Nonstationarity, Penalized least squares, Panel cointegration, Purchasing power parity

Discipline

Econometrics

Research Areas

Econometrics

Publication

Econometric Theory

Volume

36

Issue

3

First Page

410

Last Page

456

ISSN

0266-4666

Identifier

10.1017/S0266466619000197

Publisher

Cambridge University Press

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1017/S0266466619000197

Download

Included in

Econometrics Commons

Share

COinS