On The Panel Unit Root Tests Using Nonlinear Instrumental Variables
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Authors
Im, Kyung So
Pesaran, M. Hashem
Publication Date
2004-06-16Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics
Language
en_GB
Type
Working Paper
Metadata
Show full item recordCitation
Im, K. S., & Pesaran, M. H. (2004). On The Panel Unit Root Tests Using Nonlinear Instrumental Variables. https://doi.org/10.17863/CAM.5079
Abstract
This paper re-examines the panel unit root tests proposed by Chang (2002). She establishes asymptotic independence of the t-statistics when integrable functions of lagged dependent variable are used as instruments even if the original series are cross sectionally dependent. She claims that her non-linear instrumental variable (NIV) panel unit root test is valid under general error cross correlations for any N (the cross section dimension) as T (the time dimension of the panel) tends to infinity. These results are largely due to her particular choice of the error correlation matrix which results in weak cross section dependence. Also, the asymptotic independence property of the t- statistics disappears when Chang's modified instruments are used. Using a common factor model with a sizeable degree of cross section correlations, we show that Chang's NIV panel unit root test suffers from gross size distortions, even when N is small relative to T.
Keywords
Classification-JEL: C12, C15, C22, C23, Non-linear Instrumental Variable (NIV) panel unit root tests, cross-section dependence, finite sample properties
Identifiers
This record's DOI: https://doi.org/10.17863/CAM.5079
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