Panel Data Unit Root Tests Research Articles

PANEL DATA UNIT ROOT TEST WITH FIXED TIME DIMENSION

The consideration of the limit theory in which T is fixed and N is allowed to go to infinity improves the finite-sample properties of the tests and avoids the imposition of the relative rates at which T and N go to infinity.

Is There a Natural Rate of Crime?

AbstractStudies in the economics of crime literature have reached mixed conclusions on the deterrence hypothesis. One explanation that has been offered for the failure to find evidence of a deterrent effect in the long run is the natural rate of crime. This article applies univariate unit root tests to crime series for the United Kingdom and United States and panel unit roots to crime rates for a panel of G7 countries to examine whether there is a natural rate of crime. Our main finding is that when we allow for two structural breaks in the univariate unit root test and a structural break in the panel data unit root test, there is strong evidence of a natural rate of crime. The policy implications of our findings is that governments should focus on altering the economic and social structural profile that determines crime in the long run rather than increasing expenditure on law enforcement that will at best reduce crime rates in the short run.

Labour taxes and unemployment evidence from a panel unobserved component model

This paper estimates the impact of labour taxes on unemployment using a panel of yearly observations (1970–2005) for 16 OECD countries. Possible heterogeneity of the unemployment incidence of taxes is taken into account by grouping countries according to their wage-setting institutions. Panel data unit root and cointegration tests show that unemployment and labour tax rates are non-stationary but not cointegrated. As this finding may be induced by missing non-stationary variables, we set up a panel unobserved component model. Labour taxes are found to have a positive impact on unemployment only in countries characterised by strong but decentralised unions.

Testing for nominal convergence in the Central American area: evidence from panel data unit-root tests

Inflation convergence between the Central American Area and the United States is investigated using both recent homogeneous and heterogeneous panel data unit-root methods. Strong rejections of unit-root hypothesis are found, and therefore evidence of Purchasing Power Parity, in the Central American countries for the 1981:1–2005:4 period. Then by considering the nominal convergence criterion, the dollarization system seems to be suited to this region.

Do house prices reflect fundamentals? Aggregate and panel data evidence

We investigate whether recently high and consequently rapidly decreasing U.S. house prices have been justified by fundamental factors such as personal income, population, house rent, stock market wealth, building costs, and mortgage rate. We first conduct the standard unit root and cointegration tests with aggregate data. Nationwide analysis potentially suffers from problems of the low power of stationarity tests and the ignorance of dependence among regional house markets. Therefore, we also employ panel data stationarity tests which are robust to cross-sectional dependence. Contrary to previous panel studies of the U.S. housing market, we consider several, not just one, fundamental factors. Our results confirm that panel data unit root tests have greater power as compared with univariate tests. However, the overall conclusions are the same for both methodologies. The house price does not align with the fundamentals in sub-samples prior to 1996 and from 1997 to 2006. It appears that the real estate prices take long swings from their fundamental value and it can take decades before they revert to it. The most recent correction (a collapsed bubble) occurred around 2006.

Purchasing Power Parity Under the Current Float

Purchasing power parity (PPP) is an important benchmark model in international finance. Recent literature emphasizes that panel unit root tests have higher power than univariate unit root tests. The results from the ADF unit root test also support the recent literature. Using four panel data unit root tests for the 1990:1 - 2006:3 period, we re-examine the PPP both for developed countries and emerging market economies during the floating exchange rate period. Our empirical results fail to support long-run PPP for both developed countries and emerging market economies.

A more powerful panel unit root test with an application to PPP

Applying the new panel unit root test developed in this article, we can overcome the pitfalls of old-fashioned panel unit root tests making it possible for researchers testing individual series for a unit root while taking contemporaneous cross- sectional dependence into account. The proposed test is indeed more powerful than univariate Augmented Dickey–Fuller (ADF) test in rejecting false I(1) time series. The long-run purchasing power parity (PPP) hypothesis on four OECD countries was tested between year 1950 and 1995. Evidence in favor of long-run PPP was absent when using single ADF and traditional panel data unit root test, however, when using the new test developed in this article we find strong evidence in favour of long-run purchasing power parity for three out of four OECD countries. The finite sample performance of the new test is examined though Monte Carlo Simulation, and was superior as compared to that of single ADF unit root test.

New revelations about unemployment persistence in Spain: time-series and panel data approaches using regional data

This article aims to re-examine the persistence of unemployment in Spain. For this purpose, we use time-series and cross-section analysis. From a time-series viewpoint we disaggregate unemployment by regions, and use unit root tests, AR coefficients and fractional differencing parameters as indicators of persistence. For the cross-section approach, we first estimate mean regressions of regional unemployment rates. Then, using a panel of 114 periods and 50 provinces, we estimate pooled, fixed and random effects models. Finally, following some recent developments, we implement several panel data unit root tests. Previous studies had already shown the strong persistence of Spanish unemployment. Our disaggregated analysis extends the finding to reveal that the persistence is greater in the most industrialized regions. The results also suggest that a structural break took place in 1994, implying a decline in the unemployment persistence since then.

TFP in Tunisian Manufacturing Sectors: Convergence or Catch-Up with OECD Members?

Total Factor Productivity (TFP) is analyzed for six Tunisian manufacturing sectors: food processing, electrical and metal products, chemical activities, textiles, clothing and leather, building materials and ceramics, miscellaneous products. First, sector-based TFP are calculated over a long period (1983–2002) as well as some sub-periods reflecting changes of local economic policy. Then, using an accounting framework, we decompose the industrial productivity into a reallocation effect (i.e., variation in the relative distribution of sectoral value added), and a pure productivity effect (i.e., the sectoral value-added shares being constant). Secondly, through panel data unit root tests, TFP long-term convergence with or without catch-up is examined with respect to the productive performance of OECD members. Each of the six Tunisian manufacturing sectors is benchmarked by the productive performance of OECD members. The Dickey–Fuller type test that we use allows us to take into account the potential correlation across OECD countries. The empirical analysis highlights two main findings. TFP convergence and catch-up have generally been a joint process. Moreover, the sectors where catch-up occurred were those with the best productive performance and those that succeeded in reducing the productivity gap with regard to the best OECD performers.

TESTING FOR REAL INTEREST RATE PARITY USING PANEL STATIONARITY TESTS WITH DEPENDENCE: A NOTE*

In this paper we test for real interest parity (RIRP) among the 19 major OECD countries over the period 1978:Q1–2006:Q1 using both short‐ and long‐run definitions of interest rates. Once the independence hypothesis is rejected among these series, we test for RIRP using panel data unit root and stationarity tests based on common factor models that allow for pervasive forms of dependence. Our results indicate that there is no evidence in favor of the weak version of the RIRP since one of the common factors that have been estimated is non‐stationary.

The sustainability of fiscal policy: evidence from a panel of six South-Mediterranean countries

This article aims at assessing the sustainability of fiscal policies in a panel of six South-Mediterranean countries, namely Egypt, Israel, Lebanon, Morocco, Tunisia and Turkey. First, using panel data unit-root tests proposed by Im et al. (2003), Maddala and Wu (1999), and Choi (2001), econometric findings reveal that the variables of public expenditure, revenue and domestic debt in level are not stationary. However, employing panel cointegration tests designed by Pedroni (1999), it is found that government spending and revenue are cointegrated. This implies that fiscal policies in these countries are sustainable in the long run, i.e. they are consistent with inter-temporal budget balance in accordance with the present-value approach.

TAR Panel Unit Root Tests and Real Convergence

AbstractThe authors propose a new panel data methodology to test real convergence in a non‐linear framework. This extends the existing methods by combining three approaches: the threshold model, the panel data unit root tests, and the computation of critical values by bootstrap simulation. The authors apply their methodology to the per capita outputs of a total of 15 European countries, including some of the East European countries that have recently joined the EU.

Debt sustainability in the EU New Member States: empirical evidence from a panel of eight Central and East European countries

This article aims to assess the sustainability of fiscal policies in a panel of eight EU New Member States, namely Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia. First, using panel data unit-root tests, econometric findings show that the variables public expenditure and revenue are not stationary. However, employing panel cointegration tests, it is found that government spending and revenue are cointegrated. This implies that fiscal policies in these countries are sustainable in the long run, i.e. they are consistent with inter-temporal budget balance in accordance with the present-value approach. Finally, these results are confirmed if we exclude the countries with sound public finances, namely the three Baltic States and Slovenia: we obtain the same conclusion with a panel comprising Bulgaria, the Czech Republic, Poland and the Slovak Republic.

Unit Roots and the Dynamics of Market Shares: An Analysis Using Italian Banking Micro-Panel

The paper proposes the use of panel data unit root tests to assess market share instability in order to have (preliminary) indications of the industry dynamic. The idea is to consider the movements in market shares not only as element of the market structure but rather reflecting conduct that arise from that market. If shares are mean-reverting, the firm actions only have a temporary effect on shares. On the other hand, if they are evolving, as signaled by the presence of unit roots, the gain in shares respect with the competitors could be long-term. To illustrate the potential of unit roots tests, I consider an application to the Italian retail banking industry.

The hypothesis of a unit root in OECD inflation revisited

This paper investigates the hypothesis of a unit root in inflation for 13 OECD countries over the period 1957–2005, taking into account cross-sectional dependence and multiple mean shifts. We conduct unit root testing with the more powerful unit root tests with cross-dependence proposed by Smith et al. [Smith, L. V., Leybourne, S., Kim, T., & Newbold, P. (2004). More powerful panel data unit root tests with an application to the mean reversion in real exchange rates. Journal of Applied Econometrics, 19(2), 147–170] and a bootstrap version of the panel stationarity test of Hadri [Hadri, K. (2000). Testing for stationarity in heterogeneous panel data. The Econometrics Journal, 3(2), 148–161.], which provide inconclusive evidence on the time series properties of OECD inflation rates. To shed some light on this issue, we employ the recently developed panel stationarity test of Carrión-i-Silvestre et al. [Carrión-i-Silvestre, J. L., Del Barrio, T., & López-Bazo, E. (2005). Breaking the panels: An application to the GDP per capita. The Econometrics Journal, 8(2), 159–175] that assumes a highly flexible trend function by incorporating an unknown number of breaks in level. Overall, our confirmatory analysis renders clear-cut evidence in favor of regime-wise stationarity. Furthermore, the breaks in inflation detected are closely associated with macroeconomic shocks and changes in monetary policy.

Market integration and convergence to the law of one price in the North American onion markets

AbstractThe North American agricultural markets have become much more integrated; but the level of integration varies across sectors and over time. Differential tariff phasing‐out periods and remaining trade disputes are two of many factors contributing to this. This article applies panel data unit root tests to study price convergence and market integration in the North American onion markets. Commodity and variety monthly base price data for the period of 1998 to 2006 are used. Empirical results decisively suggest the existence of price convergence across markets as well as onion varieties. A two‐sample period analysis shows an increase in the speed of price convergence over time, suggesting deeper market integration as NAFTA was fully implemented. Further analysis based on a two‐country‐market basis found that U.S.–Canadian markets have experienced deeper market integration compared with U.S.–Mexican markets as well as Canadian–Mexican markets. [EconLit citations: F150, Q170]. © 2008 Wiley Periodicals, Inc.

Purchasing power parity in OECD countries: Evidence from panel unit root

This paper investigates the validity of purchasing power parity (PPP) for 25 OECD countries by using a panel unit-root methodology. The procedure used here is to examine stationarity of real exchange rate. Using ADF unit-root test on single time-series, it is found that real exchange rate of all OECD countries have unit root. This outcome, however, might be due to the generally low power of this test. The aim of this paper is to reconsider this issue by exploiting the extra information provided by the combination of the time-series and cross-sectional data and the subsequent power advantages of panel data unit-root tests. We apply the test advocated by Im et al. [Im, K.S., Pesaran, M.H., Shin, Y., 1997. Testing for unit roots in heterogenous panels. University of Cambridge, Department of Applied Economics]. According to estimation results real exchange rate in OECD countries are stationary and support long-run purchasing power parity.

Are oil shocks permanent or temporary? Panel data evidence from crude oil and NGL production in 60 countries

This paper examines the unit root properties of crude oil production for 60 countries employing a range of panel data unit root tests for the period 1971 to 2003. The study first employs a number of panel data tests that do not accommodate structural breaks and then proceeds to apply the Lagrange Multiplier (LM) panel unit root test with one structural break. The results of the panel data tests without a structural break are inconclusive with at best mixed support for joint stationarity. The findings from the LM panel unit root test with a structural break, however, are conclusive, suggesting that for a world panel and smaller regional-based panels, crude oil and NGL production are jointly stationary.

Finite-sample distribution of a recursively mean-adjusted panel data unit root test

In this paper, we investigate the finite-sample distribution of the recursively mean-adjusted panel data unit root test of Shin et al. [Shin, D.W., Kang, S. and Oh, M.-S., 2004, Recursive mean adjustment for panel unit root tests. Economics Letters, 84, 433–439.]. More precisely, we provide response surface parameters that can be used to calculate small-sample critical values for the test. Furthermore, we supply standardizing moments that can be used to calculate a test statistic that has an asymptotic standard normal distribution. The asymptotic standard normal distribution, which follows when the cross-sectional dimension increases, enables easy calculation of critical values and p-values. Hence, it is of interest to study how large the cross-sectional dimension has to be in order for the normal approximation to be valid for inference. By performing a Monte Carlo simulation, we find that the normal approximation works well, at conventional significance levels, even when the cross-sectional dimension is as small as 2. We also supply critical values and moments for the panel unit root test that can be used when the baseline model is augmented to account for serially correlated disturbances. Finally, we investigate the finite-sample size and power properties of the test and find that the test performs well even when disturbances display serial correlation.

Convergence of per capita GDP in Brazil: an empirical note

The article investigated the convergence of real gross domestic product (GDP) per capita at the state level in Brazil during the 1985–1999 period. Departures across states were evaluated in terms of panel data unit root tests advanced by Im et al . (2003). The evidence indicated that one cannot reject the null hypothesis of unit root for the (log) of the ratio of GDP of each state relative to a reference unit. The results, therefore, favour a very strong form of persistence for regional inequality.