Testing for nonlinear panel unit roots under cross-sectional dependency — With an application to the PPP hypothesis |
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| Institution: | 1. Department of Economics, Jönköping University, Sweden;2. Royal Institute of Technology (KTH), Sweden;1. LEE & Economics Dept., University Jaume I, 12071 Castellón, Spain;2. School of Agriculture Policy and Development, University of Reading, UK and LEE & Economics Dept., University Jaume I, Castellón, Spain;3. Political Science Dept., University of Crete and Institute of Applied & Computational Mathematics, Foundation for Research and Technology Hellas and Dusseldorf Institute for Competition Economics, University of Dusseldorf, Germany;4. Economics and Finance Subject Group, Portsmouth Business School, University of Portsmouth, Richmond Building, Portland Street, Portsmouth, Hampshire PO1 3DE, UK;5. Economics Dept., University of Crete, Greece |
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| Abstract: | In this paper we propose a number of nonlinear panel unit root tests that are robust to cross-sectional dependency. These tests may be used to test the null hypothesis of non-stationarity against the alternative that some or all of the time series in the system of equations follow a stationary exponential smooth transition autoregressive (ESTAR) process. In contrast to previous research we relax the assumption that the cross-correlation structure is driven by a common-factor and consider an endogenous correlation structure. Based on the size and power results from the Monte Carlo simulations we recommend using the Wald version of our cross-sectional dependent robust nonlinear panel unit root (CDR-NPU) method.Finally, in an empirical application we demonstrate that our more powerful nonlinear method, in contrast to previous methods, can provide support for PPP even in smaller samples. In consistency with the univariate tests in Bahmani-Oskooee et al. (2008) our CDR-NPU tests support the theory that less industrialized economies exhibit stronger and more distinct nonlinear adjustment patterns towards PPP. |
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