Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 299: On the power and interpretation of panel unit root tests

Sune Karlsson () and Mickael Löthgren ()
Additional contact information
Sune Karlsson: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden
Mickael Löthgren: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, S-113 83 Stockholm, Sweden

Abstract: We demonstrate that panel unit root tests can have high power when a small fraction of the series are stationary and may lack power when a large fraction is stationary. The acceptance or rejection of the null is thus not sufficient evidence to conclude that all series have a unit root or that all are stationary.

Keywords: Dynamic panels; Monte Carlo; heterogeneity

JEL-codes: C12; C15; C22; C23

11 pages, February 4, 1999

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