44 Pages Posted: 14 Apr 2012
Date Written: February 23, 2012
This paper develops a simple panel unit-root test that accommodates cross-sectional dependence among variables and smooth structural changes in deterministic components. The proposed test is the simple average of the individual statistics constructed from the breaks and cross-sectional dependence augmented Dickey-Fuller (BCADF) regression. Applying the sequential limit approach, this paper shows that the asymptotic distribution of the BCADF statistic is free of nuisance parameters as N, T go to infinity. We also extend our analysis to the case where shocks are serially correlated. The limiting distribution of the average BCADF statistic is shown to exist and its critical values are tabulated. Monte-Carlo experiments point out that the size and power of the average BCADF statistic are generally good as long as T is greater than fifty. The test is then applied to examine the validity of long-run purchasing power parity.
Keywords: Panel unit-root test, Fourier approximation, Cross-sectional dependence, Purchasing
JEL Classification: C12, C33
Suggested Citation: Suggested Citation
Lee, Chingnun and Wu, Jyh-Lin, A Panel Unit-Root Test with Smooth Breaks and Cross-Sectional Dependence (February 23, 2012). Available at SSRN: https://ssrn.com/abstract=2039620 or http://dx.doi.org/10.2139/ssrn.2039620