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Homogenous panel unit root tests under cross sectional dependence: Finite sample modifications and the wild bootstrap

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  • Herwartz, H.
  • Siedenburg, F.
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    Abstract

    First generation panel unit root tests are known to be invalid under cross sectional dependence. Focussing on the subclass of homogenous tests, three extensions of existing approaches are proposed. First, a test based on a generalized variance estimator is suggested for panels with small time and relatively large cross sectional dimension. Second, the application of refined residuals in variance estimators is proposed to reduce finite sample biases. Third, the wild bootstrap is proved to be an asymptotically valid method of resampling homogenous panel unit root test statistics. A Monte Carlo study shows that the wild bootstrap yields unbiased inference, even in cases where existing procedures are biased. Most accurate results under the null hypothesis are obtained by resampling robust statistics while there is no, or minor, evidence of power loss invoked by the wild bootstrap. An empirical illustration underpins that the current account to GDP ratio is likely panel stationary.

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    Bibliographic Info

    Article provided by Elsevier in its journal Computational Statistics & Data Analysis.

    Volume (Year): 53 (2008)
    Issue (Month): 1 (September)
    Pages: 137-150

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    Handle: RePEc:eee:csdana:v:53:y:2008:i:1:p:137-150

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    Web page: http://www.elsevier.com/locate/csda

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    Citations

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    Cited by:
    1. Vishal Jaunky, 2013. "Democracy and economic growth in Sub-Saharan Africa: a panel data approach," Empirical Economics, Springer, vol. 45(2), pages 987-1008, October.
    2. Jaunky, Vishal Chandr, 2012. "Is there a material Kuznets curve for aluminium? evidence from rich countries," Resources Policy, Elsevier, vol. 37(3), pages 296-307.
    3. Shin, Dong Wan & Park, Sangun, 2010. "Robust panel unit root tests for cross-sectionally dependent multiple time series," Computational Statistics & Data Analysis, Elsevier, vol. 54(11), pages 2801-2813, November.
    4. Herwartz, Helmut & Siedenburg, Florian, 2009. "The effects of variance breaks on homogenous panel unit root tests," Economics Working Papers 2009,07, Christian-Albrechts-University of Kiel, Department of Economics.
    5. Jaunky, Vishal Chandr, 2013. "A cointegration and causality analysis of copper consumption and economic growth in rich countries," Resources Policy, Elsevier, vol. 38(4), pages 628-639.
    6. Helmut Herwartz & Florian Siedenburg, 2013. "To converge or not converge: unit labor cost inflation in the Euro area," Empirical Economics, Springer, vol. 44(2), pages 455-467, April.

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