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Panel Cointegration Examples

FMOLS Example
Video Example
DOLS Example
Video Example
Panel Cointegration in EViews 8
The analysis of long-run cointegrating relationships has received considerable attention in
modern time series analysis. EViews 8 provides new tools for estimating cointegrating
relationships using panel data, including various forms of the residual-based panel Fully
Modified OLS (FMOLS) and Dynamic OLS (DOLS) estimators (Phillips and Moon, 1999;
Pedroni, 2000, 2001; Kao and Chiang, 2000; Mark and Sul, 2003) that produce asymptotically
unbiased, normally distributed coefficient estimates.
Below we provide examples of performing panel cointegration estimation in EViews.
Panel Cointegration FMOLS Example
To illustrate the estimation of panel cointegration models in EViews, we follow Kao, Chiang,
and Chen (KCC, 1999, International R&D Spillovers: An Application of Estimation and
Inference in Panel Cointegration, Oxford Bulletin of Economics and Statistics, 61, 693711.)
who apply panel cointegration analysis to the study of economic growth by estimating the
cointegrating relationship for total factor productivity and domestic and foreign R&D capital
stock.
The KCC data, which we provide in the workfile tfpcoint.wf1 consist of annual data on log total
factor productivity (LTFP), log domestic (LRD), and log foreign (LFRD) R&D capital stock for 22
countries for the years 1971 to 1990. We consider estimation of simple pooled FMOLS and
DOLS estimators for the cointegrating vectors as in Table 4(i) (p. 703) and Table 5(i) (p. 704).
View a video of this FMOLS example.
To begin, display the panel cointegrating equation dialog by clicking on Quick/Estimate
Equation... and then selecting COINTREG as the Estimation Method. Note that your
workfile must be a panel workfile for the panel cointegration estimation options to be
available.
Fill out the top portion of the dialog as depicted below:
Following KCC, we assume a fixed effect specification with LTFP as the dependent variable
and LRD and LFRD as the cointegrating regressors. To handle the fixed effect we specify a
Constant (Level) in the Trend specification drop-down menu.
The default panel cointegration estimation method Pooled estimation using Fully-
modified OLS (FMOLS) corresponds to the estimates in Table 4(i) of KCC, so we leave
those settings unchanged.
To match the KCC estimates, we click on Long-run variances: Options button to display
the long-run covariance settings, and change the Kernel options by setting a user-specified
bandwidth value of 6:
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Click on OK to accept the changes. Since we wish to estimate the equation using the default
coefficient covariances, we simply click on OK again to estimate the equation using the
specified settings. EViews estimates the equation and displays the results:
The top portion of the dialog displays the estimation method and information about the
sample employed in estimation. Just below the sample information EViews shows that the
estimates are based on pooled estimation using only a constant as the cross-section specific
trend regressor. The coefficient covariances are computed using the default settings, and the
long-run covariances used a Bartlett kernel with the user-specified bandwidth.
The middle section shows the coefficient estimates, standard errors, and t-statistics, which
differ a bit from the results in KCC Table 4(i), as KCC report estimates for a slightly different
model. As in KCC, both R&D variables, LRD and LFRD are positively related to LTFP, and the
coefficients are statistically significant.
The bottom portion of the output shows various summary statistics. Note in particular, the
reported Long-run variance which shows
1,2
, the estimated long-run average variance of

1it
conditional on
2it
, obtained from the DOLS residuals. The square root of this variance,
0.0367, is somewhat higher than the S.E. of the regression value of 0.0205, which is based
on the ordinary estimator of the residual variance.
Panel Cointegration DOLS Example
To estimate the model using DOLS, we again display the equation dialog, and fill out the top
portion as before:
and change the Method to Dynamic OLS (DOLS). To match the settings in KCC, we set the
Panel Method to Pooled, and specify the Fixed lags and leads, with 2 lags and 1 lead:
Click on OK to estimate the equation using the default covariance method. EViews will display
the results:
Again, the top portion of the dialog shows the estimation method, sample, and information
about settings employed in estimation. Note in particular that the default coefficient
covariance matrix computation uses an estimator of the long-run variance computed using a
Bartlett kernel and fixed Newey-West bandwidth.
The long-run coefficients, standard errors, and t-statistics are close to their counterparts in
KCC Table 5(i).
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