Scandinavian Working Papers in Economics

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

No 581: Inference for Unit Roots in a Panel Smooth Transition Autoregressive Model where the Time Dimension is Fixed

Changli He () and Rickard Sandberg ()
Additional contact information
Changli He: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Rickard Sandberg: Dept. of Economic Statistics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: In this paper we derive a unit root test against a Panel Logistic Smooth Transition Autoregressive (PLSTAR). The analysis is concentrated on the case where the time dimension is fixed and the cross section dimension tends to infinity. Under the null hypothesis of a unit root, we show that the LSDV estimator of the autoregressive parameter in the linear component of the model is inconsistent due to the inclusion of fixed effects. The test statistic, adjusted for the inconsistency, has an asymptotic normal distribution whose first two moments are calculated analytically. To complete the analysis, finite sample properties of the test are examined. We highlight scenarios under which the traditional panel unit root tests by Harris and Tzavalis have inferior or reasonable power compared to our test.

Keywords: Dynamic nonlinear panel; Smooth transitions; Structural breaks; Unit roots; LSDV estimation; Central limit theorem

JEL-codes: C12; C23; C52

37 pages, First version: January 23, 2005. Revised: February 18, 2005.

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