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Stability tests for heterogeneous panel data

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  • Félix Chan

    (School of Economics and Finance - Curtin University of Technology)

  • Tommaso Mancini-Griffoli

    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

  • Laurent L. Pauwels

    (HKMA - Hong Kong Monetary Authority - Hong Kong Monetary Authority, Graduate Institute of International Studies - Graduate Institute of International Studies)

Abstract

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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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number halshs-00589114.

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Date of creation: Dec 2006
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Handle: RePEc:hal:psewpa:halshs-00589114

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Keywords: structural change ; end-of-sample instability tests ; heterogeneous panels ; Monte Carlo ; Euro effect on trade;

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  1. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, Econometric Society, vol. 74(4), pages 967-1012, 07.
  2. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
  3. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, Econometric Society, vol. 70(1), pages 191-221, January.
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  5. Sergio Nardis & Claudio Vicarelli, 2003. "Currency unions and trade: The special case of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 139(4), pages 625-649, December.
  6. Jean Imbs & Haroon Mumtaz & Morten Ravn & Hélène Rey, 2005. "PPP Strikes Back: Aggregation and the Real Exchange Rate," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 1-43, January.
  7. Alejandro Micco & Ernesto Stein & Guillermo OrdoÃ’ez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
  8. Lúcio Vinhas de Souza, 2002. "Trade Effects of Monetary Integration in Large, Mature Economies: A Primer on the European Monetary Union," Kiel Working Papers 1137, Kiel Institute for the World Economy.
  9. Baldwin, Richard E., 2006. "The euro’s trade effects," Working Paper Series, European Central Bank 0594, European Central Bank.
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  11. Jerry Coakley & Ana-Maria Fuertes & Ron Smith, 2002. "A Principal Components Approach to Cross-Section Dependence in Panels," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data B5-3, International Conferences on Panel Data.
  12. Stefan de Wachter & Elias Tzavalis, 2004. "Detection of Structural Breaks in Linear Dynamic Panel Data Models," Working Papers, Queen Mary, University of London, School of Economics and Finance 505, Queen Mary, University of London, School of Economics and Finance.
  13. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  14. David Barr & Francis Breedon & David Miles, 2003. "Life on the outside: economic conditions and prospects outside euroland," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 573-613, October.
  15. Han, Aaron K & Park, Daekeun, 1989. "Testing for Structural Change in Panel Data: Application to a Study of U.S. Foreign Trade in Manufacturing Goods," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 135-42, February.
  16. Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1015, Cowles Foundation for Research in Economics, Yale University.
  17. Sergio Nardis, 2004. "Currency unions and trade: The special case of EMU," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 140(3), pages 625-649, September.
  18. Flam, Harry & Nordström, Håkan, 2006. "Trade Volume Effects of the Euro: Aggregate and Sector Estimates," Seminar Papers, Stockholm University, Institute for International Economic Studies 746, Stockholm University, Institute for International Economic Studies.
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  20. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, Elsevier, vol. 20(2), pages 249-272, April.
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Cited by:
  1. Chiu, Yi-Bin & Lee, Chien-Chiang & Sun, Chia-Hung, 2010. "The U.S. trade imbalance and real exchange rate: An application of the heterogeneous panel cointegration method," Economic Modelling, Elsevier, vol. 27(3), pages 705-716, May.

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