restricted estimators are inconsistent. In particular, imposing invalid parameter<sup>homogeneityin</sup> dynamic models typically leads to downward-biased estimates of<sup>the</sup> speed<sup>of adjustment</sup> (Robertson and Symons **1992,** Pesaran and Smith **1995).** For our purposes, the pooled mean group estimator offers the best<sup>availablecompromise</sup> in the choice between consistency and efficiency. This estimator<sup>is particularlyusefulwhen,as</sup> in our case, the long run is given **by** country-independent equilibrium conditions<sup>while the short-</sup> run adjustment depends on country characteristics **--** such as,<sup>e.g., financial development and/or</sup> relative price flexibility. Furthermore, the PMG estimator is sufficiently<sup>flexible to allowfor</sup> long-run coefficient homogeneity over only a subset of variables and/or<sup>countries.</sup> Therefore, we use the PMG method to estimate a long-run relationship that is common across countries (i.,e, **_fik'_ =P** for all **ij** and _k=1,...,4)_ while allowing for unrestricted country heterogeneity in the adjustment dynamics. The interested reader is referred<sup>to Pesaran,Shinand</sup> Smith **(1999)** where the PMG estimator is developed and compared with<sup>the</sup><sup>**MG**estimator.</sup> Briefly, the PMG estimator proceeds as follows. The estimation<sup>of the long-run coefficientss</sup> done jointly across countries through a (concentrated) maximum likelihood<sup>procedure.Thenthe</sup> estimation of short-run coefficients (including the speed of adjustment<sup>**9),**country-specific</sup> intercepts **_Poi,_** and country-specific error variances is done on<sup>a country-by-countrybasis, also</sup> through maximum likelihood and using the estimates of the long-run<sup>coefficientspreviously</sup> obtained.'o An important assumption for the consistency of our PMG estimates<sup>is the independence</sup> of the regression residuals across countries. In practice, non- zero error<sup>covariancesusuallyarise</sup> from _omitted_ common factors that influence the countries' ARDL processes.<sup>Weseek to</sup> eliminate these common factors and, thus, ensure the independence<sup>condition through two means.</sup>

**10** The comparison of the asymptotic properties of PMG and<sup>**MG**estimates canbe put also in termsof the general</sup> trade-off between consistency and efficiency noted in the text. **If**<sup>the long-run coefficientsarein fact equalacross</sup> countries, then the PMG estimates will be consistent and efficient, whereas<sup>the</sup><sup>**MG**estimates will only be consistent.</sup> **If,** on the other hand, the long-run coefficients are not equal<sup>acrosscountries, thenthe PMGestimates will be</sup> inconsistent, whereas the **MG** estimator will still provide<sup>aconsistentestimate ofthemeanof long-runcoefficients</sup> across countries. The long-run homogeneity restrictions can be tested using<sup>Hausman orlikelihood ratio teststo</sup> compare the PMG and **MG** estimates of the long run coefficients. In<sup>turn, comparisonof the smallsample properties</sup> of these estimators relies on their sensitivity to outliers.<sup>In small samples (low T and</sup><sup>**N),**the</sup><sup>**MG**estimator, being an</sup> unweighted average, is very sensitive to outlying country estimates<sup>(for instancethose obtained withsmallT).The</sup> PMG estimator performs better in this regard because it produces<sup>estimatesthat are similar</sup><sup>_to weighted_averagesof</sup> the respective country-specific estimates, where the weights are given according<sup>to</sup> their<sup>precision(that is, the</sup> inverse of their corresponding variance-covariance matrix).

**10**