GC 14/02: A fixed-T version of Breitung's panel data unit root test and its asymptotic local power

Abstract

We extend Breitung's (2000) large-T panel data unit root test to the case of fixed time dimension while still allowing for heteroscedastic and serially correlated error terms. The analytic local power function of the new test is derived assuming that only the cross section dimension of the panel grows large. It is found that if the errors are serially uncorrelated the test also has trivial power, but, if not, this is no longer the case. Monte Carlo experiments show that the suggested test is more powerful than its large-T, original version when the number of cross section units is moderate or large, regardless of the number of time series observations.

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Authors

Yiannis Karavias and Elias Tzavalis

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