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Testing for unit roots on heterogeneous panels: A sequential approach

Author

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  • Nguyen, Anh
  • Hénin, Pierre-Yves
  • Jolivaldt, Philippe

Abstract

The is a growing trend of criticism against the use of panel data unit root test for assessing hypotheses such as the purchasing power parity. The usual argument of a gain in power with respect to univariate unit root tests is not relevant as different nulls are involved when testing on panel data. In the context of a comparative, multi-country, study, inference based on individual unit root tests suffers mainly from a huge size distortion, even more than from low power. When the null hypothesis is -as usually in comparative research- a number of countries for which the variable of interest follows a unit root process, we propose to adopt a sequential strategy, as a way to combine a rigourous control over the size with the search for satisfactory power. We show how usual statistics have to be adapted, and we illustrate the implementation of this strategy both through simulation and through an empirical application to the PPP hypothesis within the OECD countries.

Suggested Citation

  • Nguyen, Anh & Hénin, Pierre-Yves & Jolivaldt, Philippe, 2001. "Testing for unit roots on heterogeneous panels: A sequential approach," CEPREMAP Working Papers (Couverture Orange) 0108, CEPREMAP.
  • Handle: RePEc:cpm:cepmap:0108
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    File URL: http://www.cepremap.fr/depot/couv_orange/co0108.pdf
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    Cited by:

    1. Christophe Hurlin & Valérie Mignon, 2005. "Une synthèse des tests de racine unitaire sur données de panel," Economie & Prévision, La Documentation Française, vol. 0(3), pages 253-294.
    2. repec:jed:journl:v:42:y:2017:i:3:p:89-109 is not listed on IDEAS

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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