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A Simple Panel-CADF Test for Unit Roots

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  • Mauro Costantini
  • Claudio Lupi

Abstract

In this paper we propose a simple extension to the panel case of the covariate- augmented Dickey Fuller (CADF) test for unit roots developed in Hansen (1995). The extension we propose is based on a p values combination approach that takes into account cross-section dependence. We show that the test is easy to compute, has good size properties and gives power gains with respect to other popular panel approaches. A procedure to compute the asymptotic p values of Hansen's CADF test is also a side-contribution of the paper. We also complement Hansen (1995) and Caporale and Pittis (1999) with some new theoretical results. Two empirical applications are carried out for illustration purposes on international data to test the PPP hypothesis and the presence of a unit root in international industrial production indices.

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Bibliographic Info

Article provided by Department of Economics, University of Oxford in its journal Oxford Bulletin of Economics and Statistics.

Volume (Year): 75 (2013)
Issue (Month): 2 (04)
Pages: 276-296

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Handle: RePEc:bla:obuest:v:75:y:2013:i:2:p:276-296

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References

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  1. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, . "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-Economic Data," Working Papers 170, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  2. Jomana Amara & David Papell, 2006. "Testing for Purchasing Power Parity using stationary covariates," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 29-39.
  3. Chang, Yoosoon, 2002. "Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency," Working Papers 2000-08, Rice University, Department of Economics.
  4. Elliott, Graham & Pesavento, Elena, 2006. "On the Failure of Purchasing Power Parity for Bilateral Exchange Rates after 1973," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1405-1430, September.
  5. Elliott, Graham & Jansson, Michael, 2002. "Testing for Unit Roots with Stationary Covariates," University of California at San Diego, Economics Working Paper Series qt4v35s2gv, Department of Economics, UC San Diego.
  6. Anindya Banerjee & Massimiliano Marcellino & Chiara Osbat, . "Testing for PPP: Should We Use Panel Methods?," Working Papers 186, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Campbell, J.Y. & Perron, P., 1991. "Pitfalls and Opportunities: What Macroeconomics should know about unit roots," Papers 360, Princeton, Department of Economics - Econometric Research Program.
  8. Costantini, Mauro & Lupi, Claudio, 2011. "A Simple Panel-CADF Test for Unit Roots," Economics Series 261, Institute for Advanced Studies.
  9. Matei Demetrescu & Uwe Hassler & Adina-Ioana Tarcolea, 2006. "Combining Significance of Correlated Statistics with Application to Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(5), pages 647-663, October.
  10. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
  11. Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics 300., Boston College Department of Economics.
  12. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  13. Lyhagen, Johan, 2000. "Why not use standard panel unit root test for testing PPP," Working Paper Series in Economics and Finance 413, Stockholm School of Economics.
  14. Caporale, Guglielmo Maria & Pittis, Nikitas, 1999. " Unit Root Testing Using Covariates: Some Theory and Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(4), pages 583-95, November.
  15. DeJong, David N. & Nankervis, John C. & Savin, N. E. & Whiteman, Charles H., 1992. "The power problems of unit root test in time series with autoregressive errors," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 323-343.
  16. Westerlund, Joakim & Costantini, Mauro, 2006. "Panel Cointegration and the Neutrality of Money," Working Papers 2006:18, Lund University, Department of Economics.
  17. Costantini, Mauro & Lupi, Claudio & Popp, Stephan, 2007. "A Panel-CADF Test for Unit Roots," Economics & Statistics Discussion Papers esdp07039, University of Molise, Dept. EGSeI.
  18. M. Hashem Pesaran, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," CESifo Working Paper Series 1229, CESifo Group Munich.
  19. Peter C. B. Phillips & Zhijie Xiao, 1998. "A Primer on Unit Root Testing," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 423-470, December.
  20. Claudio Lupi, . "Unit Root CADF Testing with R," Journal of Statistical Software, American Statistical Association, vol. 32(i02).
  21. repec:ebl:ecbull:v:3:y:2008:i:26:p:1-11 is not listed on IDEAS
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Citations

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Cited by:
  1. Mauro Costantini & Claudio Lupi, 2013. "A Simple Panel-CADF Test for Unit Roots," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 276-296, 04.
  2. Costantini, Mauro & Lupi, Claudio, 2014. "Identifying I(0) Series in Macro-panels: Are Sequential Panel Selection Methods Useful?," Economics & Statistics Discussion Papers esdp14073, University of Molise, Dept. EGSeI.
  3. João Sousa Andrade & Marta Simões & Adelaide Duarte, 2013. "Despesa Pública em Educação e Saúde e Crescimento Económico: Um Contributo para o Debate sobre as Funções Sociais do Estado," GEMF Working Papers 2013-18, GEMF - Faculdade de Economia, Universidade de Coimbra.
  4. Lupi, Claudio, 2011. "Panel-CADF Testing with R: Panel Unit Root Tests Made Easy," Economics & Statistics Discussion Papers esdp11063, University of Molise, Dept. EGSeI.

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