Kristian Jönsson: Sveriges Riksbank, Postal: Macroprudential Division, Financial Stability Department, Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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.
23 pages, July 11, 2003
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