On The Panel Unit Root Tests Using Nonlinear Instrumental Variables
AbstractThis paper re-examines the panel unit root tests proposed by Chang (2002). She establishes asymptotic independence of the t-statistics when integrable functions of lagged dependent variable are used as instruments even if the original series are cross sectionally dependent. She claims that her non-linear instrumental variable (NIV) panel unit root test is valid under general error cross correlations for any N (the cross section dimension) as T (the time dimension of the panel) tends to infinity. These results are largely due to her particular choice of the error correlation matrix which results in weak cross section dependence. Also, the asymptotic independence property of the t- statistics disappears when Chang's modified instruments are used. Using a common factor model with a sizeable degree of cross section correlations, we show that Chang's NIV panel unit root test suffers from gross size distortions, even when N is small relative to T.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0347.
Date of creation: Oct 2003
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Non-linear Instrumental Variable (NIV) panel unit root tests; cross-section dependence; finite sample properties;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-23 (All new papers)
- NEP-ECM-2003-11-23 (Econometrics)
- NEP-ETS-2003-11-23 (Econometric Time Series)
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