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Unit Roots and Identification in Autoregressive Panel Data Models: A Comparison of Alternative Tests

  • Stephen Bond

    (Institute for Fiscal Studies)

  • Céline Nauges

    (LEERNA-INRA Toulouse)

  • Frank Windmeijer

    (Institute for Fiscal Studies)

We compare the finite sample behaviour of various unit root tests for micro panels where the number of individuals is typically large, but the number of time periods is often very small. As in this case some econometric estimators do not identify the parameters of interest when the processes are random walks, it is important to test for unit roots/identification. We find that a t-test based on OLS estimation results provides a simple robust test with high power for cases when the variance of the unobserved heterogeneity is relatively small. Its behaviour is similar to the underidentification test as proposed by Arellano, Hansen and Sentana (1999) for the GMM estimator on a first-differenced model.

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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 C5-4.

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Date of creation: Mar 2002
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Handle: RePEc:cpd:pd2002:c5-4
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  1. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-95, November.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  3. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  5. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
  6. Michael Binder, Cheng Hsiao, and M. Hashem Pesaran, 2001. "Estimation and Inference in Short Panel Vector Autoregressions with Unit Roots and Cointegration," Computing in Economics and Finance 2001 36, Society for Computational Economics.
  7. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-26, November.
  8. Frank Windmeijer, 2000. "A finite sample correction for the variance of linear two-step GMM estimators," IFS Working Papers W00/19, Institute for Fiscal Studies.
  9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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