Panel LM Unit‐root Tests with Level Shifts*

Kyung So Im · Junsoo Lee · Margie A. Tieslau

396 citations0/0 files storedOxford Bulletin of Economics and Statistics

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Monetary Policy and Economic Impact Spatial and Panel Data Analysis Diverse Scientific and Economic Studies

Abstract

Abstract This paper proposes a new panel unit‐root test based on the Lagrangian multiplier (LM) principle. We show that the asymptotic distribution of the new panel LM test is not affected by the presence of structural shifts. This result holds under a mild condition that N/T→k, where k is any finite constant. Our simulation study shows that the panel LM unit‐root test is not only robust to the presence of structural shifts, but is more powerful than the popular Im, Pesaran and Shin (IPS) test. We apply our new test to the purchasing power parity (PPP) hypothesis and find strong evidence for PPP.

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References

2003Testing for unit roots in heterogeneous panels 2002Unit root tests in panel data: asymptotic and finite-sample properties 1989The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis 1999A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test 2001Unit root tests for panel data 1984Testing for Unit Roots in Autoregressive-Moving Average Models of Unknown Order 2003Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks 1997Further evidence on breaking trend functions in macroeconomic variables

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