On The Panel Unit Root Tests Using Nonlinear Instrumental Variables

Kyung So Im and Mohammad Pesaran

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: This paper re-examines the panel unit root tests proposed by Chang (2002). She establishes asymptotic independence of the t-statistics when integrable functions of lagged dependent variable are used as instruments even if the original series are cross sectionally dependent. She claims that her non-linear instrumental variable (NIV) panel unit root test is valid under general error cross correlations for any N (the cross section dimension) as T (the time dimension of the panel) tends to infinity. These results are largely due to her particular choice of the error correlation matrix which results in weak cross section dependence. Also, the asymptotic independence property of the t- statistics disappears when Chang's modified instruments are used. Using a common factor model with a sizeable degree of cross section correlations, we show that Chang's NIV panel unit root test suffers from gross size distortions, even when N is small relative to T.

Keywords: Non-linear Instrumental Variable (NIV) panel unit root tests; cross-section dependence; finite sample properties (search for similar items in EconPapers)
JEL-codes: C12 C15 C22 C23 (search for similar items in EconPapers)
Pages: 12
Date: 2003-10
New Economics Papers: this item is included in nep-ecm and nep-ets
Note: EM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

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