A simple panel unit root test in the presence of cross‐section dependence
Open accessAbstract
A number of panel unit root tests that allow for cross‐section dependence have been proposed in the literature that use orthogonalization type procedures to asymptotically eliminate the cross‐dependence of the series before standard panel unit root tests are applied to the transformed series. In this paper we propose a simple alternative where the standard augmented Dickey–Fuller (ADF) regressions are augmented with the cross‐section averages of lagged levels and first‐differences of the individual series. New asymptotic results are obtained both for the individual cross‐sectionally augmented ADF (CADF) statistics and for their simple averages. It is shown that the individual CADF statistics are asymptotically similar and do not depend on the factor loadings. The limit distribution of the average CADF statistic is shown to exist and its critical values are tabulated. Small sample properties of the proposed test are investigated by Monte Carlo experiments. The proposed test is applied to a panel of 17 OECD real exchange rate series as well as to log real earnings of households in the PSID data. Copyright © 2007 John Wiley & Sons, Ltd.
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Using the Pesaran (2007) panel unit-root test, the null of homogeneous nonstationarity is rejected for all variables.
“Using the Pesaran (2007) panel unit-root test in the presence of cross-section dependence, we reject the null of homogeneous nonstationarity (i.e., all countries are non-stationary) for all variables.”
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- Authors
- Pesaran, M. H.
- Affiliations
- University of Cambridge (GB)
- Corresponding author
- Pesaran, M. Hashem
- ORCID
- Pesaran, M. Hashem
- Venue
- Journal of Applied Econometrics
- Publisher
- Wiley
- Published
- 2007-03
- Volume
- 22
- Issue
- 2
- Pages
- 265-312
- ISSN
- 0883-7252 (ISSN-L)
- 1099-1255
- OpenAlex
- W3124091918
- Cited by
- 12,787
- References
- 0
- Citations by year
- 2026: 1692 · 2025: 1602 · 2024: 1601 · 2023: 1675 · 2022: 1439 · 2021: 1064 · 2020: 786 · 2019: 529 · 2018: 387 · 2017: 314 · 2016: 275 · 2015: 250 · 2014: 222 · 2013: 194 · 2012: 183
- FWCI
- 280.01
- Type
- journal article
- Language
- en
- Open access
- bronze
- doi.org
- Locations
- Journal of Applied Econometrics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Spatial and Panel Data Analysis
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Diverse Scientific and Economic Studies
- Keywords
- panel unit root tests, cross-sectional dependence, asymptotic distribution, critical values, small sample properties, factor loadings, real exchange rate, household earnings
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