Nonstationary-Volatility Robust Panel Unit Root Tests and the Great Moderation

Robert Czudaj and Christoph Hanck

VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association

Abstract: This paper argues that typical applications of panel unit root tests should take possible nonstationarity in the volatility process of the innovations of the panel time series into account. Nonstationarity volatility arises for instance when there are structural breaks in the innovation variances. A prominent example is the reduction in GDP growth variances enjoyed by many industrialized countries, known as the `Great Moderation.' It also proposes a new testing approach for panel unit roots that is, unlike many previously suggested tests, robust to such volatility processes. The panel test is based on Simes' [Biometrika 1986, "An Improved Bonferroni Procedure for Multiple Tests of Signi cance"] classical multiple test, which combines evidence from time series unit root tests of the series in the panel. As time series unit root tests, we employ recently proposed tests of Cavaliere and Taylor [Journal of Time Series Analysis 2008b, "Time-Transformed Unit Root Tests for Models with Non-Stationary Volatility"]. The panel test is robust to general patterns of cross-sectional dependence and yet is straightforward to implement, only requiring valid p-values of time series unit root tests, and no resampling. Monte Carlo experiments show that other panel unit root tests suffer from sometimes severe size distortions in the presence of nonstationary volatility, and that this defect can be remedied using the test proposed here. We use the methods developed here to test for unit roots in OECD panels of gross domestic products and inflation rates, yielding inference robust to the `Great Moderation.' We find little evidence of trend stationarity, and mixed evidence regarding inflation stationarity.

JEL-codes: C12 C23 E31 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/79734/1/VfS_2013_pid_280.pdf (application/pdf)

Related works:
Journal Article: Nonstationary-volatility robust panel unit root tests and the great moderation (2015)
Working Paper: Nonstationary-Volatility Robust Panel Unit Root Tests and the Great Moderation (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc13:79734

Access Statistics for this paper

More papers in VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().