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Testing for Stationarity in Panel Data Models when Disturbances are Cross-Sectionally Correlated

Author

Listed:
  • Jönsson, Kristian

    (Sveriges Riksbank)

Abstract
In this paper, we investigate the effects of cross-sectional disturbance correlation on a previously suggested panel data stationarity test. We find that the previously suggested test has a serious size distortion if the disturbances to different cross sections are correlated. We suggest a new panel data test procedure that also tests the null hypothesis of stationarity. However, the test procedure that we suggest is robust against the presence of cross-sectional disturbance correlation, as well as serial correlation. Furthermore, the test has an approximate normal distribution and which makes p-values and critical values easy to obtain. By applying our test to investigate output convergence, we illustrate the adverse effects that can occur when neglecting to account for cross-sectional correlation when testing for stationarity in panel data models.

Suggested Citation

  • Jönsson, Kristian, 2004. "Testing for Stationarity in Panel Data Models when Disturbances are Cross-Sectionally Correlated," Working Papers 2004:17, Lund University, Department of Economics, revised 26 Nov 2004.
    • Handle: RePEc:hhs:lunewp:2004_017
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    References listed on IDEAS

    as
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    Cited by:

    1. Kristian Jonsson, 2006. "Time-specific disturbances and cross-sectional dependency in a small-sample heterogeneous panel data unit root test," Applied Economics, Taylor & Francis Journals, vol. 38(11), pages 1309-1317.
    2. Kristian Jonsson, 2009. "Time-specific disturbances in a panel stationarity test," Applied Economics, Taylor & Francis Journals, vol. 43(7), pages 845-853.
    3. García Solanes, José & Torrejón-Flores, Fernando, 2009. "The Balassa-Samuelson Hypothesis in Developed Countries and Emerging Market Economies: Different Outcomes Explained," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-24.
    4. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.

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    More about this item

    Keywords

    Panel-Data Stationarity; Cross-Sectional Dependence; Output Convergence;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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