Felix Chan (School of Economics and Finance, Curtin University of Technology) Tommaso Mancini-Griffoli (Swiss National Bank, Paris School of Economics (PSE), CEPREMAP) Laurent L. Pauwels (Hong Kong Monetary Authority, Graduate Institute of International Studies, Geneva)
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This paper proposes a new test for structural stability in panels by extending the testing procedure proposed in the seminal work of Andrews (2003) originally developed for time series. The test is robust to non-normal, heteroskedastic and serially correlated errors, and, importantly, allows for the number of post break observations to be small. Moreover, the test accommodates the possibility 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 cross sectional dimension of panel data. This greatly facilitates the calculation of critical values with respect to the test's time series counterpart. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. Finally, the test is illustrated in practice, in a brief study of the euro's effect on trade.
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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number
092008.
Length: 31 pages Date of creation: Sep 2008 Date of revision: Handle: RePEc:hkm:wpaper:092008
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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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