Abstract:
We study the panel DOLS estimator of a homogeneous cointegration vector for a balanced panel of N individuals observed over T time
periods. Allowable heterogeneity across individuals include individual-specific time trends, individual-specific fixed effects and time-
specific effects. The estimator is fully parametric, computationally convenient, and more precise than the single equation estimator.
For fixed N as T approaches infinity, the estimator converges to a function of Brownian motions and the Wald statistic for testing a set
of linear constraints has a limiting chi-square distribution. The estimator also has a Gaussian sequential limit distribution that is
obtained first by letting T go to infinity then letting N go to infinity. In a series of Monte Carlo experiments, we find that the asymptotic distribution theory provides a reasonably close approximation to the exact finite sample distribution. We use panel dynamic
OLS to estimate coefficients of the long-run money demand function from a panel of 19 countries with annual observations that span from
1957 to 1996. The estimated income elasticity is 1.08 (asymptotic s.e.=0.26) and the estimated interest rate semi-elasticity is -0.02
(asymptotic s.e.=0.01).