Testing for Multicointegration in Panel Data with Common Factors

This paper addresses the concept of multicointegration in a panel data framework and builds upon the panel data cointegration procedures developed in Pedroni ["Econometric Theory" (2004), Vol. 20, pp. 597-625]. When individuals are either cross-section independent, or cross-section dependence can be removed by cross-section demeaning, our approach can be applied to the wider framework of mixed "I"(2) and "I"(1) stochastic processes. The paper also deals with the issue of cross-section dependence using approximate common-factor models. Finite sample performance is investigated through Monte Carlo simulations. Finally, we illustrate the use of the procedure investigating an inventories, sales and production relationship for a panel of US industries. Copyright 2006 Blackwell Publishing Ltd.