Panel Data Unit Root Tests Research Articles

Does foreign direct investment impede environmental quality in high-, middle-, and low-income countries?

Under a multivariate framework, this paper aims to investigate the nonlinear correlation between foreign direct investment and environmental degradation for high-, middle-, and low-income countries with economic growth and energy consumption as additional determinants of environmental degradation. All variables were found to be nonstationary and cointegrated based on recent panel data unit-root tests and cointegration techniques. On applying fully modified ordinary least squares (FMOLS), the long-run results suggest the presence of an environmental Kuznets curve. In turn, foreign direct investment increases environmental degradation, thus confirming the pollution haven hypothesis (PHH). Moreover, the bidirectional causality between CO2 emissions and foreign direct investment is observed globally. The findings are sensitive to different income groups and regional analyses. In particular, these empirical findings aid sound economic policymaking for improving environmental quality and sustainable economic development.

ANÁLISIS NO LINEAL DE LA CONVERGENCIA REGIONAL EN AMÉRICA LATINA, 1950-2010: UN MODELO PANEL TAR

This paper analyzes the hypothesis of regional convergence in Latin America through a non-linear growth model for the time period 1950-2010. The methodology combines three approaches: the threshold autoregressive model (tar), panel data unit root tests and calculating critical values with a bootstrapping simulation. The results of the tests applied to the per capita gross domestic product (gdp) of two groups of countries in Latin America (the wealthiest and then all nations in the region) suggest that the linear model is superior to the non-linear model and show no evidence of partial or absolute convergence. We did not identify a group of countries in the region with higher per capita income that would behave as a leading economy. Our results cast doubt on other studies conducted with linear tests that did find conditional convergence in some countries in the region.

Health Care Expenditure and GDP in Oil Exporting Countries: Evidence From OPEC Data, 1995-2012.

Background:There is a large body of literature examining income in relation to health expenditures. The share of expenditures in health sector from GDP in developed countries is often larger than in non-developed countries, suggesting that as the level of economic growth increases, health spending increase, too.Objectives:This paper estimates long-run relationships between health expenditures and GDP based on panel data of a sample of 12 countries of the Organization of the Petroleum Exporting Countries (OPEC), using data for the period 1995-2012.Patients & Methods:We use panel data unit root tests, cointegration analysis and ECM model to find long-run and short-run relation. This study examines whether health is a luxury or a necessity for OPEC countries within a unit root and cointegration framework.Results:Panel data analysis indicates that health expenditures and GDP are co-integrated and have Engle and Granger causality. In addition, in oil countries that have oil export income, the share of government expenditures in the health sector is often greater than in private health expenditures similar developed countries.Conclusions:The findings verify that health care is not a luxury good and income has a robust relationship to health expenditures in OPEC countries.

International technology transfer and domestic patent policy: An empirical analysis of Indian industry

Firms in the developing countries transfer technology predominantly produced in the developed economies through different modes namely market-mediated channels including trade in goods and services, foreign direct investment, licensing or non-market channels like employees turnover. Multitude of host country’s factors (locational and policy related) influences the mode-choice decision of multinational enterprises among exports, FDI and licensing to work in a host country. Among these factors, provision for the protection of patent rights reduces transactions costs that lead to externalization in form of arm’s-length licensing against FDI. India has made patent policy changes during the post globalization period to comply with Trade Related Intellectual Property Rights Agreement. Accordingly, this study attempts to find the influence of the patent policy changes on licensing strategy of the Indian manufacturing industry. This paper is based on panel data of 51 industries for period 1989-90 to 2009-10. We have checked each panel data regression for the presence of heteroscedasticity, contemporaneous correlation and serial correlation. In case of the presence of heteroscedasticity and contemporaneous correlation the results are based on heteroskedastic panels corrected standard errors and correlated panels corrected standard errors. As the modeling is based on macro-panel data having large number of industries (N) and time period (T) each data series is checked for unit-root using panel data unit-root tests. The study uses Fisher type test. We estimate the model after controlling for the general policy changes in India following the liberalization, privatization and globalization of the economy. We are able to establish a substitutable relationship between licensing from international market and in-house R&D. The removal of licensing regulations of different industries has a positive influence on the firm’s decision to license. We also find a complementary relationship between capital goods import and licensing. Thus, policy makers should allow for easy capital imports to facilitate technology transfers. The study indicates that patent policy influences technology transfer to India albeit negatively and limited to patent-sensitive industries confirming the monopoly power effect for such industries. Thus, policy makers have to use regulatory approach to facilitate transfers instead of merely relying on the market approach. Moreover, with respect to patent-sensitive industries there is need to closely watch the licensing behavior of the technology owners for anti-competitive practices.

Synergy between an Improved Covariate Unit Root Test and Cross‐sectionally Dependent Panel Data Unit Root Tests

This paper proposes the use of an improved covariate unit root test which exploits the cross‐sectional dependence information when the panel data null hypothesis of a unit root is rejected. More explicitly, to increase the power of the test, we suggest the utilization of more than one covariate and offer several ways to select the ‘best’ covariates from the set of potential covariates represented by the individuals in the panel. Employing our methods, we investigate the Prebish‐Singer hypothesis for nine commodity prices. Our results show that this hypothesis holds for all but the price of petroleum.

A fixed-[formula omitted] version of Breitung’s panel data unit root test

We extend Breitung’s (2000) panel data unit root test to the case of fixed time (T) 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 correlated, the test has non-trivial power. Monte Carlo experiments show that the suggested test is more powerful when the number of cross section units is moderate or large, regardless of the number of time series observations.

Unit roots and the dynamics of market shares: an analysis using an Italian banking micro-panel

The paper proposes the use of panel data unit-root tests to assess market-share instability in order to obtain indications of industry dynamics. The idea is to consider movements in market shares as much more than mere elements of the market structure. In fact, these movements reflect conduct that arises from that market. If shares are mean-reverting, then firm actions have only a temporary effect on shares. On the other hand, if shares are evolving, as signaled by the presence of unit roots, then any gain in shares with respect to the competitors is long term. To illustrate the potential of unit-roots tests, the paper considers an application to the Italian retail banking industry.

Are shocks to copper consumption persistent?

This paper investigates whether shocks to copper consumption for 37 countries over the period 1967–2010 are transitory or persistent. A variety of time-series unit root tests is first employed. This is followed by several generations of panel data unit root tests. The presence of structural breaks is taken into account while performing those tests. In addition, cross-sectional dependence is detected and effectively controlled when applying some new generations of panel unit root tests. Copper consumption is found to follow a non-stationary process for about 86 % of the countries. There is also overwhelming evidence of a similar process when panel unit root tests are applied. Generally, shocks to copper consumption are found to be persistent.

New Evidence on Gibrat’s Law for Cities

The aim of this work is to test empirically the validity of Gibrat’s law on the growth of cities, using data on the complete distribution of cities (without size restrictions) from three countries (the US, Spain and Italy) for the entire 20th century. In order to achieve this, different techniques are used. First, panel data unit root tests tend to confirm the validity of Gibrat’s law in the upper-tail distribution. Secondly, when the entire distribution is considered using non-parametric methods, it is found that Gibrat’s law does not hold exactly in the long term (in general, size affects the variance of the growth process but not its mean). Moreover, the log-normal distribution works well as a description of city size distributions across the whole century when no truncation point is considered.

Assessing the financial integration of Central and Eastern European countries with the euro area: Evidence from panel data cointegration tests

L’objectif de ce papier est d’évaluer le niveau d’intégration financière des pays d’Europe Centrale et Orientale (PECO) vis-à-vis de la zone euro dans la perspective de leur intégration au sein de l’Union économique et monétaire (UEM). Nous retenons l’approche développée par Feldstein-Horioka en estimant le coefficient de corrélation entre taux d’épargne et taux d’investissement sur un panel non-stationnaire et hétérogène composé des 10 PECO et de la zone euro. Afin de pallier certains problèmes empiriques soulevés par cette approche, nous utilisons les techniques économétriques les plus récentes de cointégration en panel. Nos résultats montrent que le processus d’intégration financière des PECO au sein de la zone euro n’est pas encore achevé et qu’il est étroitement lié au régime monétaire suivi par ces différents pays. Classification JEL : C23 ; F31 ; F41.

Testing for unit roots in short panels allowing for a structural break

Panel data unit root tests which allow for a common structural break in the individual effects or linear trends of the AR(1) panel data model are suggested. These allow the date of the break to be unknown. The tests assume that the time-dimension of the panel (T) is fixed (finite) while the cross-section (N) is large. Under the null hypothesis of unit roots, they are similar to the initial conditions of the model and its individual effects. Extensions of the tests to the AR(2) model are provided. These highlight the difficulties in extending the tests to higher order serial correlation of the error terms. Monte Carlo experiments indicate that the small sample performance of the tests is very satisfactory. Application of the tests to the trade openness variable of the non-oil countries indicates that evidence of persistence of this variable can be attributed to trade liberalization policies adopted by many developing countries since the early nineties.

Democracy and economic growth in Sub-Saharan Africa: a panel data approach

This paper studies the link between democracy and economic development for 28 countries of Sub-Saharan Africa for the period 1980–2005 in a panel data framework. A democracy index constructed from the Freedom House indices. A variety of panel data unit root and cointegration tests are applied. The variables are found to be integrated of order one and cointegrated. The Blundell–Bond system generalized methods-of-moments is employed to conduct a panel error-correction mechanism based causality test within a vector autoregressive structure. Economic growth is found to cause democracy in the short-run, while bidirectionality is uncovered in the long-run. In addition, the long-run coefficients are estimated through the panel fully modified ordinary least squares and dynamic ordinary least squares methods. Democracy has a positive impact on GDP and vice versa. These results lend support to the virtuous cycle hypothesis.

Are shocks to brands permanent or transient?

In this study, we used panel data unit root tests to analyze the effects of unexpected shocks on the economic values of brands. Our analysis classified such effects into two categories: permanent or transient. If the effects are permanent, brands would have difficulties in getting rid of the negative impacts. In contrast, if shocks are transient, brands would recover over time. The results show that some sectors are more vulnerable than others when negative impact persists and does not diminish over time. Our results cast doubt over conventional thinking that all shocks affect brands in a uniform manner and can be generically remedied.

Aluminum Consumption and Economic Growth: Evidence from Rich Countries

The article attempts to test the aluminum consumption–economic growth nexus for 20 rich economies for the period 1970–2009. Various panel data unit root and cointegration tests are applied. The series are found to be integrated of order one and cointegrated, especially after controlling for cross-sectional dependence. Moreover, the Blundell–Bond system generalized methods-of-moments is employed to conduct a panel causality test in a vector error-correction mechanism setting. Unidirectional causality running from aluminum consumption to real GDP is uncovered in the short-run, while real GDP is found to Granger-cause aluminum consumption in the long-run. Moreover, a 1% increase in real GDP generates an increase of 0.44% in aluminum consumption in the long-run for the whole panel.

Assessing the financial integration of Central and Eastern European countries with the euro area: Evidence from panel data cointegration tests

The aim of this paper is to assess the financial integration degree of the Central and Eastern European Countries (CEECs) with the euro area in the prospect of their integration in the Economic and Monetary Union (EMU). To this end, we test the Feldstein-Horioka regression for a non-stationary and heterogeneous panel of 10 CEECs and the euro area. In order to overcome some empirical shortcomings of this approach, we employ the recently developed panel data unit root tests and cointegration techniques. The empirical findings reveal that the financial integration process of the CEECs with the euro area is not yet complete. Another contribution of this paper is to show that this process is linked to the institutional monetary arrangement of these countries.

Pharmaceutical Price Convergence In The EU: Preliminary Results From The Panel Data Unit Root Test

This paper explores the case of market integration and price convergence in the European Union, specifically in the pharmaceutical industry. The EU has been experiencing market integration since 1992, through the removal of trade barriers, the establishment of a single market, and the reduction of exchange rate volatility. In addition, there have been several structural reforms in product markets designed to increase competition, monitor cross-country price differences and increase transparency. One anticipated effect of market integration is price convergence, because of the reduced potential for price discrimination across the EU. This paper is aimed to analyze market integration and price convergence in the European pharmaceutical market, which is the fifth largest industry in the EU. Since 1985, many EU directives have been adopted to achieve a single EU-wide pharmaceutical market, with the aim of enhancing the quality of life for European citizens and the European pharmaceutical industrys competitiveness and research and development capability. Using annual 19942003 IMS Health panel data from five EU countries on prices of drugs used to treat cardiovascular disease and controlling drug and market characteristics; this paper examines how the integration process has affected cross-country drug price dispersion in the EU through the preliminary results from the panel data unit root test. Finally, the results show some evidence of price convergence in the pharmaceutical market, with long term price differences arising from country fixed effects.

The CO2 emissions-income nexus: Evidence from rich countries

The paper attempts to test the Environment Kuznets Curve (EKC) hypothesis for 36 high-income countries for the period 1980–2005. The test is based on the suggestion of Narayan and Narayan (2010). Various panel data unit root and co-integration tests are applied. Carbon dioxide (CO2) emissions and GDP series are integrated of order one and co-integrated, especially after controlling for cross-sectional dependence. Additionally, the Blundell–Bond system generalised methods of moments (GMM) is employed to conduct a panel causality test in a vector error-correction mechanism (VECM) setting. Unidirectional causality running from real per capita GDP to per capita CO2 emissions is uncovered in both the short-run and the long-run. The empirical analysis based on individual countries provides evidence of an EKC for Greece, Malta, Oman, Portugal and the United Kingdom. However, it can be observed that for the whole panel, a 1% increase in GDP generates an increase of 0.68% in CO2 emissions in the short-run and 0.22% in the long-run. The lower long-run income elasticity does not provide evidence of an EKC, but does indicate that, over time, CO2 emissions are stabilising in the rich countries.

Convergence of real per capita GDP within COMESA countries: A panel unit root evidence

This article examines the absolute and conditional convergence of real GDP per capita in the Common Market for Eastern and Southern Africa (COMESA) during the period 1950–2003. Income departures across countries were evaluated from several panel data unit root tests. We find no evidence supporting the existence of convergence process for the income in the COMESA. Nevertheless, applying economic development criterion allows to identity two absolute convergence clubs into the COMESA, one for the most four developed countries (Egypt, Libya, Mauritius, Seychelles), and one other for the fourteen less developed ones. Thus, we show that most economies of COMESA are locked into a sustained poverty trap process.

Model specification in panel data unit root tests with an unknown break

Although the impact of structural breaks on testing for unit root has been studied extensively for univariate time-series, such impact on panel data unit root tests is still relatively unknown. A major issue is the choice of model in accommodating different types of break prior to testing for unit root. Model misspecification has been known to affect unit root tests performance in the univariate case but the effect of misspecification on panel tests is still unknown. This paper has two objectives: (i) it proposes a new test for unit root in the presence of structural break for panel data. The test allows the intercepts, the trend coefficients or both to change at different date for different individuals. Moreover, the test allows for the possibility that only some, but not all, of the individuals experienced structural breaks. Under some mild assumptions, the test statistics is shown to be asymptotically normal which greatly facilitates valid inferences. (ii) This paper provides a systematic study on the impact of structural instability on testing for unit root using Monte Carlo Simulation. The results show that correct specification is crucial for unit root testing in the presence of structural instability. In addition, the proportion of individuals experienced structural instability can also affect the performance of the test substantially.

Does Long Run Purchasing Power Parity (PPP) Hold Within The Southern African Customs Union (SACU)?

This paper employs panel data unit root and co-integration tests, in the spirit of Pedroni (1995, 1998) and Larsson et al. (1998, 2001), to investigate the validity or otherwise of the PPP hypothesis within the SACU area. We are able to find evidence in support of the PPP hypothesis using Larsson et al. (1998, 2001). The Larsson et al.’s (1998, 2001) procedure is an extension of Johansen’s (1988, 1995) methodology that allows for estimation of the number of co-integrating relations. This offers an interesting alternative to the residual based co-integration tests