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A Panel Unit Root Test with Good Power in Small Samples

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  • Claude Lopez

Abstract

We propose a new pooled panel unit root test allowing for serial and contemporaneous correlation. The test combines Elliott et al. (1996) local-to-unity transformation with a pooled panel ADF test, and accounts for contemporaneous correlation by estimating the residual covariance matrix. The critical values are bootstrapped and Monte Carlo simulations demonstrate enhanced performances, especially when the series are highly persistent and the panel cross-sectional and time series dimensions are relatively small. An application of the test to the real exchange rate convergence for the post Bretton-Woods period leads to strong and reliable rejections of the unit root.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

Volume (Year): 28 (2009)
Issue (Month): 4 ()
Pages: 295-313

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Handle: RePEc:taf:emetrv:v:28:y:2009:i:4:p:295-313

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Related research

Keywords: Bootstrap test; GLS-detrending; Panel unit root test;

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References

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Citations

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Cited by:
  1. Lopez, Claude & Papell, David, 2010. "Are euro area inflation rates misaligned?," MPRA Paper 27929, University Library of Munich, Germany.
  2. Claude Lopez, 2004. "Evidence of Purchasing Power Parity for the Floating Regime Period," University of Cincinnati, Economics Working Papers Series 2004-01, University of Cincinnati, Department of Economics, revised Mar 2006.
  3. Joakim Westerlund, . "On the Importance of the First Observation in GLS Detrending in Unit Root Testing," Financial Econometics Series 2014_07, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  4. Kanas, Angelos, 2006. "Purchasing Power Parity and Markov Regime Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1669-1687, September.
  5. Jean-François HOARAU & Claude Lopez & Michel PAUL, 2009. "Short Note on the Unemployment Rate of the French Overseas Regions," University of Cincinnati, Economics Working Papers Series 2009-3, University of Cincinnati, Department of Economics.
  6. Vajanne, Laura, 2007. "Integration in euro area retail banking markets – convergence of credit interest rates," Research Discussion Papers 27/2007, Bank of Finland.
  7. Giray GOZGOR, 2013. "Unemployment Persistence and Inflation Convergence: Evidence from Regions of Turkey," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 13(1), pages 55-64.
  8. Cushman, David O. & Michael, Nils, 2011. "Nonlinear trends in real exchange rates: A panel unit root test approach," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1619-1637.

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