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Level shifts in a panel data based unit root test. An application to the rate of unemployment

  • Josep Lluis Carrion Silvestre
  • Tomas del Barrio Castro
  • Enrique Lopez Bazo

    (Universitat de Barcelona)

Several unit root tests in panel data have recently been proposed. The test developed by Harris and Tzavalis (1999 JoE) performs particularly well when the time dimension is moderate in relation to the cross-section dimension. However, in common with the traditional tests designed for the unidimensional case, it was found to perform poorly when there is a structural break in the time series under the alternative. Here we derive the asymptotic distribution of the test allowing for a shift in the mean, and assess the small sample performance. We apply this new test to show how the hypothesis of (perfect) hysteresis in Spanish unemployment is rejected in favour of the alternative of the natural unemployment rate, when the possibility of a change in the latter is considered.

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Paper provided by Universitat de Barcelona. Espai de Recerca en Economia in its series Working Papers in Economics with number 79.

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Length: 53 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:bar:bedcje:200279
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Espai de Recerca en Economia, Facultat de Ciències Econòmiques. Tinent Coronel Valenzuela, Num 1-11 08034 Barcelona. Spain.

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