Felix Chan Tommaso Mancini-Griffoli Laurent L. Pauwels (School of Economics and Finance, Curtin University of Technology Paris-Jourdan Sciences Economiques (PSE), CEPREMAP Hong Kong Monetary Authority and Graduate Institute of International Studies, Geneva)
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This paper proposes a new test for structural instability in heterogeneous panels. The test builds on the seminal work of Andrews (2003) originally developed for time series. It is robust to non-normal, heteroskedastic and serially correlated errors, and allows for the number of post break observations to be small. Importantly, the test considers the alternative of a break affecting only some - and not all - individuals of the panel. Under mild assumptions the test statistic is shown to be asymptotically normal, thanks to the additional cross sectional dimension of panel data. This greatly facilitates the calculation of critical values. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. The test is then applied to investigate the effect of the Euro on trade.
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Paper provided by Economics Section, The Graduate Institute of International Studies in its series HEI Working Papers with number
24-2006.
Find related papers by JEL classification: C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
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