Nonstationary Heterogeneous Panels with Multiple Structural Changes

Badi H. Baltagi (), Qu Feng and Wei Wang
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Badi H. Baltagi: Center for Policy Research, Maxwell School, Syracuse University, 426 Eggers Hall, Syracuse, NY 13244, https://www.maxwell.syr.edu/directory/badi-h-baltagi
Wei Wang: Shandong University of Finance and Economics

No 265, Center for Policy Research Working Papers from Center for Policy Research, Maxwell School, Syracuse University

Abstract: Nonstationary panels have been widely used in empirical studies in macroeconomics and finance. This paper considers multiple structural changes in nonstationary heterogeneous panels with common factors. Kapetanios, Pesaran, Yamagata (2011) showed that unobserved nonstationary factors can be proxied by cross-sectional averages of observable data. This means that unobserved error factors can be treated as additional regressors, and different break points in slopes and error factor loadings can be considered as multiple breaks in linear regression models with panel data. We generalize the least squares approach by Bai and Perron (1998) to nonstationary panels and show that the break points in both slopes and error factor loadings can be consistently estimated for two important cases involving i) nonstationary factors and ii) nonstationary regressors. Monte Carlo simulations are conducted to verify the main results in finite samples. Finally, we illustrate our methods with an empirical example examining the effect of international R&D spillovers on domestic total factor productivity in OECD countries. A common break in 1992 is detected and attributed to the acceleration of globalization that began in the early 1990s.

Keywords: Nonstationary Panels; Multiple Structural Changes; Heterogeneity; Common Factors; Common Correlated Effects. (search for similar items in EconPapers)
JEL-codes: C13 C23 C33 C38 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2025-03
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Persistent link: https://EconPapers.repec.org/RePEc:max:cprwps:265

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