Testing panel cointegration with unobservable dynamic common factors that are correlated with the regressors

The paper proposes statistics to test the null hypothesis of no cointegration in panel data when common factors drive the cross-sectional dependence. We focus on the case in which regressors and the common factors are correlated, although the uncorrelated case is also discussed. Both endogenous and strictly exogenous regressors are considered. The test statistics are shown to have limiting distributions independent of the common factors, making it possible to pool the individual statistics. Simulations indicate that the proposed procedures have good finite sample performance.