A panel cointegrating rank test with structural breaks and cross-sectional dependence

A new panel cointegrating rank test which allows for a linear time trend with breaks and cross-sectional dependence is proposed. The new correlation-augmented inverse normal (CAIN) test is based on a modification of the inverse normal method and combines the p-values of individual likelihood-ratio trace statistics by assuming that the number of breaks and break points are known. A Monte Carlo study demonstrates its robustness to cross-sectional dependence and its superior size and power properties compared to other meta-analytic tests used in practice. The test is applied to investigate the long-run relationship between regional house prices and personal income in the United States in view of the structural break introduced by the Global Financial Crisis.