Generalized fixed-T panel unit root tests allowing for structural breaks

Yiannis Karavias and Elias Tzavalis

Discussion Papers from University of Nottingham, Granger Centre for Time Series Econometrics

Abstract: In this paper we suggest panel data unit root tests which allow for structural breaks in the individual effects or linear trends of panel data models. This is done under the assumption that the disturbance terms of the panel are heterogenous and serially correlated. The limiting distributions of the suggested test statistics are derived under the assumption that the time-dimension of the panel (T) is fixed while the cross-section (N) grows large. Thus, they are appropriate for short panels, where T is small. The tests consider the cases of a known and unknown date break. For the latter case, the paper gives the analytic form of the distribution of the test statistics. Monte Carlo evidence suggests that our tests have size which is very close to its nominal level and satisfactory power in small-T panels. This is true even for cases where the degree of serial correlation is large and negative, where single time series unit root tests are found to be critically oversized.

Keywords: Panel data models; unit roots; structural breaks (search for similar items in EconPapers)
Date: 2012-02
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Citations: View citations in EconPapers (2)

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