Unit root inference in generally trending and cross-correlated fixed-T panels

Donald Robertson, Vasilis Sarafidis, Joakim Westerlund

Research output: Contribution to journalArticleResearchpeer-review

4 Citations (Scopus)

Abstract

This article proposes a new panel unit root test based on the generalized method of moments approach for panels with a possibly small number of time periods, T, and a large number of cross-sectional units, N. In the model that we consider the deterministic trend function is essentially unrestricted and the errors obey a multifactor structure that allows for rich forms of unobserved heterogeneity. In spite of these allowances, the GMM estimator considered is shown to be asymptotically unbiased, (Formula presented.)-consistent, and asymptotically normal for all values of the autoregressive (AR) coefficient, ρ, including unity, making it a natural candidate for unit root inference. Results from our Monte Carlo study suggest that the asymptotic properties are borne out well in small samples. The implementation is illustrated by using a large sample of US banking institutions to test Gibrat’s Law.

Original languageEnglish
Pages (from-to)493-504
Number of pages12
JournalJournal of Business and Economic Statistics
Volume36
Issue number3
DOIs
Publication statusPublished - 2018

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