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GMM Unit Root Inference in Generally Trending and Cross-Correlated Dynamic Panels

  • Robertson, Donald
  • Sarafidis, Vasilis
  • Westerlund, Joakim

This paper proposes a new panel unit root test based on the generalized method of moments approach for panels with a small number of time periods and a large number of cross-section units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors are cross-sectionally correlated in a very general fashion. In spite of these allowances, the GMM-statistic is shown to be asymptotically unbiased, square root N-consistent and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it an ideal candidate for unit root inference. Results from both simulated and real data are provided to suggest that the asymptotic properties are borne out well in small samples.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 53419.

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Date of creation: 05 Feb 2014
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Handle: RePEc:pra:mprapa:53419
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  1. Robertson, Donald & Sarafidis, Vasilis & Symons, James, 2010. "IV Estimation of Panels with Factor Residuals," MPRA Paper 26166, University Library of Munich, Germany.
  2. Jushan Bai & Serena Ng, 2001. "A PANIC Attack on Unit Roots and Cointegration," Boston College Working Papers in Economics 519, Boston College Department of Economics.
  3. 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.
  4. Richard Harris & Elias Tzavalis, 2004. "Testing for Unit Roots in Dynamic Panels in the Presence of a Deterministic Trend: Re-examining the Unit Root Hypothesis for Real Stock Prices and Dividends," Econometric Reviews, Taylor & Francis Journals, vol. 23(2), pages 149-166.
  5. Chesher, Andrew, 1979. "Testing the Law of Proportionate Effect," Journal of Industrial Economics, Wiley Blackwell, vol. 27(4), pages 403-11, June.
  6. Sarafidis, Vasilis & Wansbeek, Tom, 2010. "Cross-sectional Dependence in Panel Data Analysis," MPRA Paper 20367, University Library of Munich, Germany.
  7. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
  8. Chirok Han & Peter C.B. Phillips, 2007. "GMM Estimation for Dynamic Panels with Fixed Effects and Strong Instruments at Unity," Cowles Foundation Discussion Papers 1599, Cowles Foundation for Research in Economics, Yale University.
  9. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  10. 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.
  11. Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
  12. Rembert De Blander & Geert Dhaene, 2012. "Unit root tests for panel data with AR(1) errors and small T," Econometrics Journal, Royal Economic Society, vol. 15(1), pages 101-124, 02.
  13. Edith Madsen, 2010. "Unit root inference in panel data models where the time-series dimension is fixed: a comparison of different tests," Econometrics Journal, Royal Economic Society, vol. 13(1), pages 63-94, 02.
  14. Hugo Kruiniger, 2006. "GMM Estimation and Inference in Dynamic Panel Data Models with Persistent Data," Working Papers 560, Queen Mary University of London, School of Economics and Finance.
  15. 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.
  16. Steve Bond & Céline Nauges & Frank Windmeijer, 2005. "Unit roots: identification and testing in micro panels," CeMMAP working papers CWP07/05, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  17. Maurice J.G. Bun & Frank Windmeijer, 2007. "The Weak Instrument Problem of the System GMM Estimator in Dynamic Panel Data Models," Bristol Economics Discussion Papers 07/595, Department of Economics, University of Bristol, UK.
  18. Jushan Bai, 2013. "Fixed‐Effects Dynamic Panel Models, a Factor Analytical Method," Econometrica, Econometric Society, vol. 81(1), pages 285-314, 01.
  19. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  20. Jushan Bai, 2009. "Panel Data Models With Interactive Fixed Effects," Econometrica, Econometric Society, vol. 77(4), pages 1229-1279, 07.
  21. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  22. Joakim Westerlund & J�rg Breitung, 2013. "Lessons from a Decade of IPS and LLC," Econometric Reviews, Taylor & Francis Journals, vol. 32(5-6), pages 547-591, August.
  23. Hugo Kruiniger, 2006. "Quasi ML Estimation of the Panel AR(1) Model with Arbitrary Initial Conditions," Working Papers 582, Queen Mary University of London, School of Economics and Finance.
  24. Peter C. B. Phillips & Donggyu Sul, 2003. "Dynamic panel estimation and homogeneity testing under cross section dependence *," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 217-259, 06.
  25. Kaddour Hadri & Rolf Larsson, 2005. "Testing for stationarity in heterogeneous panel data where the time dimension is finite," Econometrics Journal, Royal Economic Society, vol. 8(1), pages 55-69, 03.
  26. S. de Silva & K. Hadri & A. R. Tremayne, 2009. "Panel unit root tests in the presence of cross-sectional dependence: finite sample performance and an application," Econometrics Journal, Royal Economic Society, vol. 12(2), pages 340-366, 07.
  27. Kruiniger, Hugo, 2007. "An Efficient Linear Gmm Estimator For The Covariance Stationary Ar(1)/Unit Root Model For Panel Data," Econometric Theory, Cambridge University Press, vol. 23(03), pages 519-535, June.
  28. Bai, Jushan & Ng, Serena, 2010. "Panel Unit Root Tests With Cross-Section Dependence: A Further Investigation," Econometric Theory, Cambridge University Press, vol. 26(04), pages 1088-1114, August.
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