Testing for Unit Roots in Dynamic Panels with Smooth Breaks and Cross-Sectionally Dependent Errors

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Date

2018

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Springer

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Abstract

We develop the extended unit root testing procedure for dynamic panels characterised by slowly moving trends (SMT) and cross-section dependence (CSD). We allow SMT to follow the smooth logistic transition function and the components error terms to contain the unobserved common factors. We propose the two panel unit root test statistics, one derived by the extended common correlated effects (CCE) estimator and the other based on the Sieve bootstrap. We have conducted extensive simulation exercises and document that the failure to take into account SMT and CSD may lead to misleading inference. On the other hand, we find that both bootstrap and CCE-based tests maintain good power properties in small samples in the presence SMT and CSD. We apply our proposed tests to real interest rates for 17 OECD countries and find overwhelming evidence in favour of the Fisher hypothesis.

Description

Hasanov, Mubariz/0000-0003-0216-9531; Hasanov, Mübariz/0000-0003-0216-9531

Keywords

Slow moving trends, Cross-section dependence, Common correlated estimator, Bootstrap, Panel unit root tests

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18

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Q2

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Q2

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Volume

52

Issue

1

Start Page

167

End Page

193