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Stability Tests for Heterogeneous Panel Data

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  • 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)

Abstract

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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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 092008.

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Length: 31 pages
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:hkm:wpaper:092008

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Related research

Keywords: Structural Change; Instability; Cross Sectionally Dependent Errors; Heterogeneous Panels; Monte Carlo; Euro Effect on Trade;

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References

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  1. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 9552, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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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, Elsevier, vol. 27(3), pages 705-716, May.

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