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

  • Josep Lluís Carrion-i-Silvestre

    ()

    (Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona)

  • Tomás del Barrio-Castro

    ()

    (Departament d'Econometria, Estadística i Economia Espanyola, Universitat de Barcelona)

  • Enrique López-Bazo

    ()

    (Departament d'Econometria, Estadística i Economia Espanyola, 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 International Conferences on Panel Data in its series 10th International Conference on Panel Data, Berlin, July 5-6, 2002 with number C5-2.

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Date of creation: Mar 2002
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Handle: RePEc:cpd:pd2002:c5-2
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  10. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
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  18. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation for Research in Economics, Yale University.
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