Unit Root Inference in Generally Trending and Cross-Correlated Fixed-T Panels

Donald Robertson, Vasilis Sarafidis and Joakim Westerlund

Journal of Business & Economic Statistics, 2018, vol. 36, issue 3, 493-504

Abstract: This article proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multifactor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, N$\sqrt{N}$-consistent, and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibrat’s Law.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jnlbes:v:36:y:2018:i:3:p:493-504

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DOI: 10.1080/07350015.2016.1191501

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