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Nonlinear IV Unit Root Tests in Panels with Cross-Sectional Dependency

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Author Info
Chang, Yoosoon (Rice U)
Abstract

We propose a unit root test for panels with cross-sectional dependency. We allow general dependency structure among the innovations that generate data for each of the cross-sectional units. Each unit may have different sample size, and therefore unbalanced panels are also permitted in our framework. Yet, the test is asymptotically normal, and does not require any tabulation of the critical values. Our test is based on nonlinear IV estimation of the usual augmented Dickey-Fuller type regression for each cross-sectional unit, using as instruments nonlinear transformations of the lagged levels. The actual test statistic is simply de2ned as a standardized sum of individual IV t-ratios. We show in the paper that such a standardized sum of individual IV t-ratios has limit normal distribution as long as the panels have large individual time series observations and are asymptotically balanced in a very weak sense. We may have the number of cross-sectional units arbitrarily small or large. In particular, the usual sequential asymptotics, upon which most of the available asymptotic theories for panel unit root models heavily rely, are not required. Finite sample performance of our test is examined via a set of simulations, and compared with those of other commonly used panel unit root tests. Our test generally performs better than the existing tests in terms of both 2nite sample sizes and powers. We apply our nonlinear IV method to test for the purchasing power parity hypothesis in panels.

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Paper provided by Rice University, Department of Economics in its series Working Papers with number 2000-08.

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Date of creation: Jan 2002
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Handle: RePEc:ecl:riceco:2000-08

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C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General

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  1. Yoosoon Chang & Joon Y. Park & Peter C.B. Phillips, 1999. "Nonlinear Econometric Models with Cointegrated and Deterministically Trending Regressors," Cowles Foundation Discussion Papers 1245, Cowles Foundation, Yale University. [Downloadable!]
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  2. Park, Joon Y & Phillips, Peter C B, 2001. "Nonlinear Regressions with Integrated Time Series," Econometrica, Econometric Society, vol. 69(1), pages 117-61, January.
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  3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March. [Downloadable!] (restricted)
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  4. Oh, Keun-Yeob, 1996. "Purchasing power parity and unit root tests using panel data," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 405-418, June. [Downloadable!] (restricted)
  5. Yoosoon Chang, 2000. "Bootstrap Unit Root Tests in Panels with Cross-Sectional Dependency," Cowles Foundation Discussion Papers 1251, Cowles Foundation, Yale University. [Downloadable!]
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  6. Phillips, Peter C. B. & Park, Joon Y. & Chang, Yoosoon, 2004. "Nonlinear instrumental variable estimation of an autoregression," Journal of Econometrics, Elsevier, vol. 118(1-2), pages 219-246. [Downloadable!] (restricted)
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  7. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April. [Downloadable!] (restricted)
  8. Park, Joon Y. & Phillips, Peter C.B., 1999. "Asymptotics For Nonlinear Transformations Of Integrated Time Series," Econometric Theory, Cambridge University Press, vol. 15(03), pages 269-298, June. [Downloadable!]
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  9. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January. [Downloadable!] (restricted)
  10. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February. [Downloadable!] (restricted)
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  11. Yoosoon Chang & Joon Y. Park, 1999. "Nonstationary Index Models," Working Paper Series no7, Institute of Economic Research, Seoul National University. [Downloadable!]
  12. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Wagner, Martin, 2006. "The Carbon Kuznets Curve. A Cloudy Picture Emitted by Bad Econometrics?," Economics Series 197, Institute for Advanced Studies. [Downloadable!]
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  2. Abdoul Aziz Wane, 2004. "Growth and Convergence in WAEMU Countries," IMF Working Papers 04/198, International Monetary Fund. [Downloadable!]
  3. Wagner, Martin, 2005. "On PPP, Unit Roots and Panels," Economics Series 176, Institute for Advanced Studies. [Downloadable!]
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  4. Georgios Chortareas & George Kapetanios, 2005. "How Puzzling is the PPP Puzzle? An Alternative Half-Life Measure of convergence to PPP," Money Macro and Finance (MMF) Research Group Conference 2005 36, Money Macro and Finance Research Group. [Downloadable!]
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  5. Adelina Gschwandtner, 2005. "Profit persistence in the 'very’ long run: evidence from survivors and exiters," Applied Economics, Taylor and Francis Journals, vol. 37(7), pages 793-806, April. [Downloadable!] (restricted)
  6. Hyungsik Roger Moon & Benoit Perron, 2005. "An Empirical Analysis of Nonstationarity in Panels of Exchange Rates and Interest Rates with Factors," IEPR Working Papers 05.35, Institute of Economic Policy Research (IEPR). [Downloadable!]
  7. Chang, Yoosoon, 2004. "Taking a New Contour: A Novel Approach to Panel Unit Root Tests," Working Papers 2004-05, Rice University, Department of Economics. [Downloadable!]
  8. Roberto Basile & Mauro Costantini & Sergio Destefanis, 2005. "Unit root and cointegration tests for cross-sectionally correlated panels. Estimating regional production functions," ISAE Working Papers 53, ISAE - Institute for Studies and Economic Analyses - (Rome, ITALY). [Downloadable!]
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  9. Jushan Bai & Chihwa Kao, 2005. "On the Estimation and Inference of a Panel Cointegration Model with Cross-Sectional Dependence," Center for Policy Research Working Papers 75, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  10. Jönsson, Kristian, 2004. "Testing for Stationarity in Panel Data Models when Disturbances are Cross-Sectionally Correlated," Working Papers 2004:17, Lund University, Department of Economics, revised 26 Nov 2004. [Downloadable!]
  11. Park, Joon, 2003. "Nonstationary Nonlinearity: An Outlook for New Opportunities," Working Papers 2003-05, Rice University, Department of Economics. [Downloadable!]
  12. Benoit Perron & Hyungsik Roger Moon, 2007. "An empirical analysis of nonstationarity in a panel of interest rates with factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 383-400. [Downloadable!]
  13. Park, Joon, 2003. "Strong Approximations for Nonlinear Transformations of Integrated Time Series," Working Papers 2003-18, Rice University, Department of Economics. [Downloadable!]
  14. Jaroslava Hlouskova & Martin Wagner, 2005. "The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study," Diskussionsschriften dp0503, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
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  15. Chang, Yoosoon & Song, Wonho, 2005. "Unit Root Tests for Panels in the Presence of Short-run and Long-run Dependencies: Nonlinear IV Approach with Fixed N and Large T," Working Papers 2002-06, Rice University, Department of Economics. [Downloadable!]
  16. Chang, Yoosoon & Park, Joon Y., 2004. "Taking a New Contour: A Novel View on Unit Root Test," Working Papers 2004-10, Rice University, Department of Economics. [Downloadable!]
  17. Pui Sun Tam & University of Macau, 2006. "Breaking trend panel unit root tests," Computing in Economics and Finance 2006 341, Society for Computational Economics. [Downloadable!]
  18. Samarjit Das & Kaushik Bhattacharya, 2004. "Price Convergence across Regions in India," Bonn Econ Discussion Papers bgse1_2005, University of Bonn, Germany. [Downloadable!]
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  19. Paulo M. M. Rodrigues, 2004. "Properties of Recursive Trend-Adjusted Unit Root Tests," Economics Working Papers ECO2004/31, European University Institute. [Downloadable!]
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