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Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test

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Author Info
Jönsson, Kristian () (Department of Economics, Lund University)

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Abstract

In this paper, we investigate the effects of cross-sectional disturbance correlation in a homogenous panel-data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross-sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small-sample homogenous panel-data unit root tests. The reduction in size distortion comes at small cost of lower power against a stationary alternative.

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Publisher Info
Paper provided by Lund University, Department of Economics in its series Working Papers with number 2003:10.

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Length: 23 pages
Date of creation: 11 Jul 2003
Date of revision:
Publication status: Published in Oxford Bulletin of Economics and Statistics, 2005, pages 369-392.
Handle: RePEc:hhs:lunewp:2003_010

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Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
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Related research
Keywords: Panel Data; Unit Root; Private Consumption;

Other versions of this item:

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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References listed on IDEAS
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. O'Connell, Paul G. J., 1998. "The overvaluation of purchasing power parity," Journal of International Economics, Elsevier, vol. 44(1), pages 1-19, February. [Downloadable!] (restricted)
  2. Andersson, Jonas & Lyhagen, Johan, 1999. "A long memory panel unit root test: PPP revisited," Working Paper Series in Economics and Finance 303, Stockholm School of Economics. [Downloadable!]
  3. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December. [Downloadable!] (restricted)
  4. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 141-220 National Bureau of Economic Research, Inc. [Downloadable!]
    Other versions:
  5. Papell, David H., 2002. "The great appreciation, the great depreciation, and the purchasing power parity hypothesis," Journal of International Economics, Elsevier, vol. 57(1), pages 51-82, June. [Downloadable!] (restricted)
    Other versions:
  6. Larsson, Rolf & Lyhagen, Johan & Löthgren, Mickael, 1998. "Likelihood-Based Cointegration Tests in Heterogeneous Panels," Working Paper Series in Economics and Finance 250, Stockholm School of Economics, revised 27 Aug 1998.
    Other versions:
  7. Breuer, Janice Boucher & McNown, Robert & Wallace, Myles, 2002. " Series-Specific Unit Root Tests with Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(5), pages 527-46, December. [Downloadable!] (restricted)
  8. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July. [Downloadable!] (restricted)
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  9. Harvey, A. & Bates, D., 2003. "Multivariate Unit Root Tests and Testing for Convergence," Cambridge Working Papers in Economics 0301, Faculty of Economics, University of Cambridge. [Downloadable!]
  10. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May. [Downloadable!] (restricted)
    Other versions:
  11. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  12. Karlsson, Sune & Lothgren, Mickael, 2000. "On the power and interpretation of panel unit root tests," Economics Letters, Elsevier, vol. 66(3), pages 249-255, March. [Downloadable!] (restricted)
    Other versions:
  13. Andrew Levin & Chien-Fu Lin, 1993. "Unit Root Tests in Panel Data: New Results," University of California at San Diego, Economics Working Paper Series 93-56, Department of Economics, UC San Diego. [Downloadable!]
  14. 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.
    Other versions:
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Cited by:
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  1. Fischer, Christoph, 2007. "An assessment of the trends in international price competitiveness among EMU countries," Discussion Paper Series 1: Economic Studies 2007,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Pär Österholm & Mikael Carlsson & Johan Lyhagen, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," IMF Working Papers 07/287, International Monetary Fund. [Downloadable!]
    Other versions:
  3. 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!]
  4. Alberto Behar & James Hodge, 2007. "The employment effects of mergers in a declining industry: the case of South African gold mining," Economics Series Working Papers 335, University of Oxford, Department of Economics. [Downloadable!]
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  5. Fischer, Christoph & Porath, Daniel, 2006. "A reappraisal of the evidence on PPP: a systematic investigation into MA roots in panel unit root tests and their implications," Discussion Paper Series 1: Economic Studies 2006,23, Deutsche Bundesbank, Research Centre. [Downloadable!]
  6. Xiujian Chen & Shu Lin & W. Robert Reed, 2006. "Another Look at what to do with Time-series Cross-section Data," Working Papers in Economics 06/04, University of Canterbury, Department of Economics. [Downloadable!]
    Other versions:
  7. Konstantin A. Kholodilin & Jan-Oliver Menz & Boriss Siliverstovs, 2007. "What Drives Housing Prices Down?: Evidence from an International Panel," Discussion Papers of DIW Berlin 758, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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