Advanced Search
MyIDEAS: Login

Nonstationary-Volatility Robust Panel Unit Root Tests and the Great Moderation

Contents:

Author Info

  • Christoph Hanck

    ()

  • Robert Czudaj

Abstract

This paper argues that typical applications of panel unit root tests should take possible nonstationarity in the volatility process of the innovations of the panel time series into account. Nonstationarity volatility arises for instance when there are structural breaks in the innovation variances. A prominent example is the reduction in GDP growth variances enjoyed by many industrialized countries, known as the “Great Moderation”. It also proposes a new testing approach for panel unit roots that is, unlike many previously suggested tests, robust to such volatility processes. The panel test is based on Simes‘ (1986) classical multiple test, which combines evidence from time series unit root tests of the series in the panel. As time series unit root tests, we employ recently proposed tests of Cavaliere and Taylor (2008b). The panel test is robust to general patterns of cross-sectional dependence and yet is straightforward to implement, only requiring valid p-values of time series unit root tests, and no resampling. Monte Carlo experiments show that other panel unit root tests suffer from sometimes severe size distortions in the presence of nonstationary volatility, and that this defect can be remedied using the test proposed here. We use the methods developed here to test for unit roots in OECD panels of gross domestic products and inflation rates, yielding inference robust to the “Great Moderation”. We find little evidence of trend stationarity, and mixed evidence regarding inflation stationarity.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://repec.rwi-essen.de/files/REP_13_434.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen in its series Ruhr Economic Papers with number 0434.

as in new window
Length: 44 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:rwi:repape:0434

Contact details of provider:
Postal: Hohenzollernstraße 1-3, 45128 Essen
Phone: (0201)8149-0
Fax: (0201)8149-200
Email:
Web page: http://www.rwi-essen.de/
More information through EDIRC

Order Information:
Web: http://www.rwi-essen.de/publikationen/

Related research

Keywords: Panel unit root test; nonstationary volatility; cross-sectional dependence; GDP stationarity; inflation stationarity;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Georgios Chortareas & George Kapetanios, 2004. "Getting PPP Right: Identifying Mean-Reverting Real Exchange Rates in Panels," Working Papers 517, Queen Mary, University of London, School of Economics and Finance.
  2. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  3. Murray, Christian J. & Nelson, Charles R., 2000. "The uncertain trend in U.S. GDP," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 79-95, August.
  4. David E. Rapach, 2002. "Are Real GDP Levels Nonstationary? Evidence from Panel Data Tests," Southern Economic Journal, Southern Economic Association, vol. 68(3), pages 473-495, January.
  5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  6. 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.
  7. Romero-Ávila, Diego & Usabiaga, Carlos, 2009. "The hypothesis of a unit root in OECD inflation revisited," Journal of Economics and Business, Elsevier, vol. 61(2), pages 153-161.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. repec:taf:jnlbes:v:30:y:2012:i:2:p:256-264 is not listed on IDEAS
  10. Giuseppe Cavaliere & Anders Rahbek & A. M. Robert Taylor, 2008. "Testing for Co-integration in Vector Autoregressions with Non-Stationary Volatility," Discussion Papers 08-34, University of Copenhagen. Department of Economics.
  11. DeJong, David N. & Whiteman, Charles H., 1991. "Reconsidering 'trends and random walks in macroeconomic time series'," Journal of Monetary Economics, Elsevier, vol. 28(2), pages 221-254, October.
  12. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October.
  13. Sen, Amit, 2007. "On the distribution of Dickey-Fuller unit root statistics when there is a break in the innovation variance," Statistics & Probability Letters, Elsevier, vol. 77(1), pages 63-68, January.
  14. M. Hashem Pesaran, 2007. "A simple panel unit root test in the presence of cross-section dependence," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 265-312.
  15. John Y. Campbell & Pierre Perron, 1991. "Pitfalls and Opportunities: What Macroeconomists Should Know About Unit Roots," NBER Technical Working Papers 0100, National Bureau of Economic Research, Inc.
  16. Jörg Breitung & Samarjit Das, 2005. "Panel unit root tests under cross-sectional dependence," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(4), pages 414-433.
  17. James H. Stock & Mark W. Watson, 2003. "Has the Business Cycle Changed and Why?," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 159-230 National Bureau of Economic Research, Inc.
  18. Christoph Hanck, 2013. "An Intersection Test for Panel Unit Roots," Econometric Reviews, Taylor & Francis Journals, vol. 32(2), pages 183-203, February.
  19. Darné, Olivier, 2009. "The uncertain unit root in real GNP: A re-examination," Journal of Macroeconomics, Elsevier, vol. 31(1), pages 153-166, March.
  20. Giuseppe Cavaliere & A. M. Robert Taylor, 2008. "Time-Transformed Unit Root Tests for Models with Non-Stationary Volatility," Journal of Time Series Analysis, Wiley Blackwell, vol. 29(2), pages 300-330, 03.
  21. MacKinnon, James G, 1996. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 601-18, Nov.-Dec..
  22. Cogley, T., 1989. "International Evidence On The Size Of The Random Walk In Output," Discussion Papers in Economics at the University of Washington 89-02, Department of Economics at the University of Washington.
  23. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
  24. Culver, Sarah E & Papell, David H, 1997. "Is There a Unit Root in the Inflation Rate? Evidence from Sequential Break and Panel Data Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(4), pages 435-44, July-Aug..
  25. Strauss, Jack, 2000. "Is there a permanent component in US real GDP," Economics Letters, Elsevier, vol. 66(2), pages 137-142, February.
  26. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2007. "Testing for unit roots in time series models with non-stationary volatility," Journal of Econometrics, Elsevier, vol. 140(2), pages 919-947, October.
  27. Moon, H.R. & Perron, B., 2012. "Beyond panel unit root tests: Using multiple testing to determine the nonstationarity properties of individual series in a panel," Journal of Econometrics, Elsevier, vol. 169(1), pages 29-33.
  28. MOON, Hyungsik Roger & PERRON, Benoit., 2002. "Testing for a Unit Root in Panels with Dynamic Factors," Cahiers de recherche 2002-18, Universite de Montreal, Departement de sciences economiques.
  29. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  30. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2008. "Bootstrap Unit Root Tests For Time Series With Nonstationary Volatility," Econometric Theory, Cambridge University Press, vol. 24(01), pages 43-71, February.
  31. Joseph P. Romano & Michael Wolf, 2005. "Stepwise Multiple Testing as Formalized Data Snooping," Econometrica, Econometric Society, vol. 73(4), pages 1237-1282, 07.
  32. Smeekes Stephan, 2011. "Bootstrap Sequential Tests to Determine the Stationary Units in a Panel," Research Memorandum 003, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  33. Rose, Andrew Kenan, 1988. " Is the Real Interest Rate Stable?," Journal of Finance, American Finance Association, vol. 43(5), pages 1095-1112, December.
  34. Cavaliere, Giuseppe & Taylor, A.M. Robert, 2009. "Heteroskedastic Time Series With A Unit Root," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1228-1276, October.
  35. Hamori, Shigeyuki & Tokihisa, Akira, 1997. "Testing for a unit root in the presence of a variance shift1," Economics Letters, Elsevier, vol. 57(3), pages 245-253, December.
  36. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  37. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  38. Shin, Dong Wan & Park, Soo Jung & Oh, Man-Suk, 2009. "A robust sign test for panel unit roots under cross sectional dependence," Computational Statistics & Data Analysis, Elsevier, vol. 53(4), pages 1312-1327, February.
  39. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  40. Matei Demetrescu & Uwe Hassler & Adina-Ioana Tarcolea, 2006. "Combining Significance of Correlated Statistics with Application to Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(5), pages 647-663, October.
  41. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  42. Kormendi, Roger C & Meguire, Philip, 1990. "A Multicountry Characterization of the Nonstationarity of Aggregate Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 77-93, February.
  43. Kim, Tae-Hwan & Leybourne, Stephen & Newbold, Paul, 2002. "Unit root tests with a break in innovation variance," Journal of Econometrics, Elsevier, vol. 109(2), pages 365-387, August.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rwi:repape:0434. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabine Weiler).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.