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A Nonlinear Panel Unit Root Test under Cross Section Dependence

  • Mario Cerrato
  • Christian de Peretti
  • Nick Sarantis

We propose a nonlinear heterogeneous panel unit root test for testing the null hypothesis of unit-roots processes against the alternative that allows a proportion of units to be generated by globally stationary ESTAR processes and a remaining non-zero proportion to be generated by unit root processes. The proposed test is simple to implement and accommodates cross sectional dependence. Monte Carlo simulation shows that our test holds correct size and under the hypothesis that data are generated by globally stationary ESTAR processes has a better power than the recent test proposed in Pesaran [2005]. An application to a panel of bilateral real exchange rate series with the US Dollar from the 20 major OECD countries is provided.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_08.

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Date of creation: Mar 2008
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Handle: RePEc:gla:glaewp:2008_08
Contact details of provider: Postal: Adam Smith Building, Glasgow G12 8RT
Phone: 0141 330 4618
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Web page: http://www.gla.ac.uk/schools/business/research/

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  1. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  2. Cerrato, Mario & Sarantis, Nicholas, 2007. "A bootstrap panel unit root test under cross-sectional dependence, with an application to PPP," Computational Statistics & Data Analysis, Elsevier, vol. 51(8), pages 4028-4037, May.
  3. Davide Fiaschi & Andrea Mario Lavezzi, 2003. "Nonlinear Economic Growth: Some Theory and Cross-Country Evidence," Discussion Papers 2003/14, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  4. Galor, Oded & Weil, David, 1998. "Population, Technology and Growth: From the Malthusian Regime to the Demographic Transition," CEPR Discussion Papers 1981, C.E.P.R. Discussion Papers.
  5. M. Hashem Pesaran & Elisa Tosetti, 2007. "Large Panels with Common Factors and Spatial Correlations," CESifo Working Paper Series 2103, CESifo Group Munich.
  6. Frank, Murray & Gencay, Ramazan & Stengos, Thanasis, 1988. "International chaos?," European Economic Review, Elsevier, vol. 32(8), pages 1569-1584, October.
  7. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  8. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  9. n/a, 2001. "Balance of payments prospects in EMU," NIESR Discussion Papers 164, National Institute of Economic and Social Research.
  10. Peretto, Pietro F., 1999. "Industrial development, technological change, and long-run growth," Journal of Development Economics, Elsevier, vol. 59(2), pages 389-417, August.
  11. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  12. P. Newbold & S. J. Leybourne & R. Sollis & M. E. Wohar, 2001. "U.S. and U.K. Interest Rates 1890 - 1934: New Evidence on Structural Breaks," Trinity Economics Papers 20011, Trinity College Dublin, Department of Economics.
  13. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
  14. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
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