Scandinavian Working Papers in Economics
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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2003:10:
Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test

Kristian Jönsson ()

Abstract: In this paper, we investigate the effects of cross-sectional disturbance correlation in a homogenous panel-data unit root test. As reported by other authors, the unit root test has incorrect size in the presence of cross-sectional correlation. We suggest that a previously known estimator can be used to reduce the size distortions. We supply response surface estimates for critical values and study the size characteristics of the proposed test. We find that the suggested estimator performs well in small-sample homogenous panel-data unit root tests. The reduction in size distortion comes at small cost of lower power against a stationary alternative.

Keywords: Panel Data; Unit Root; Private Consumption; (follow links to similar papers)

JEL-Codes: C23; E21; (follow links to similar papers)

23 pages, July 11, 2003

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This paper is published as:
Jönsson, Kristian, (2005), 'Cross-sectional dependency and size distortion in a small-sample homogeneous panel-data unit root test', Oxford Bulletin of Economics and Statistics, Vol. 67, No. 3, pages 369-392

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