On The Panel Unit Root Tests Using Nonlinear Instrumental Variables
This paper re-examines the panel unit root tests proposed by Chang (2002). She establishes asymptotic independence of the t-statistics when integrable functions of lagged dependent variable are used as instruments even if the original series are cross sectionally dependent. She claims that her non-linear instrumental variable (NIV) panel unit root test is valid under general error cross correlations for any N (the cross section dimension) as T (the time dimension of the panel) tends to infinity. These results are largely due to her particular choice of the error correlation matrix which results in weak cross section dependence. Also, the asymptotic independence property of the t- statistics disappears when Chang's modified instruments are used. Using a common factor model with a sizeable degree of cross section correlations, we show that Chang's NIV panel unit root test suffers from gross size distortions, even when N is small relative to T.
|Date of creation:||Oct 2003|
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- Yoosoon Chang & Joon Y. Park & Peter C.B. Phillips, 1999.
"Nonlinear Econometric Models with Cointegrated and Deterministically Trending Regressors,"
Cowles Foundation Discussion Papers
1245, Cowles Foundation for Research in Economics, Yale University.
- Yoosoon Chang & Joon Y. Park & Peter C. B. Phillips, 2001. "Nonlinear econometric models with cointegrated and deterministically trending regressors," Econometrics Journal, Royal Economic Society, vol. 4(1), pages 1-36.
- Peter C.B. Phillips & Joon Y. Park, 1998.
"Asymptotics for Nonlinear Transformations of Integrated Time Series,"
Cowles Foundation Discussion Papers
1182, Cowles Foundation for Research in Economics, Yale University.
- Park, Joon Y. & Phillips, Peter C.B., 1999. "Asymptotics For Nonlinear Transformations Of Integrated Time Series," Econometric Theory, Cambridge University Press, vol. 15(03), pages 269-298, June.
- Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003.
"Testing for unit roots in heterogeneous panels,"
Journal of Econometrics,
Elsevier, vol. 115(1), pages 53-74, July.
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- Tom Doan, . "IPSHIN: RATS procedure to implement Im, Pesaran and Shin panel unit root test," Statistical Software Components RTS00098, Boston College Department of Economics.
- Joon Y. Park & Peter C. B. Phillips, 1999.
"Nonlinear Regressions with Integrated Time Series,"
Working Paper Series
no6, Institute of Economic Research, Seoul National University.
- 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.
- Moon, H.R.Hyungsik Roger & Perron, Benoit, 2004. "Testing for a unit root in panels with dynamic factors," Journal of Econometrics, Elsevier, vol. 122(1), pages 81-126, September.
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