Inference for unit roots in dynamic panels with heteroscedastic and serially correlated errors

Paper number: 98/06

Paper date: June 1998

Year: 1998

Paper Category: Discussion Paper

Authors

Richard Harris
University of Exeter

Elias Tzavalis
University of Exeter

Abstract

In this paper we introduce a unit root test for dynamic panel data models, allowing for cross-sectional heteroscedasticity and serial correlation in the disturbance term. The limiting distribution of the test statistic is derived under the assumption that the time dimension of the panel is fixed. The test statistic is based on the pooled Least Squares estimator of the autoregressive coefficient of the panel data model, adjusted for the inconsistency that arises due to the serial correlation of the disturbance term. The limiting distribution of the test is normal with a variance that depends on the serial correlation and heteroscedasticity nuisance parameters. The paper examines the consequences of ignoring heteroscedasticity and serial correlation in panel data unit root tests.

JEL Classification Nos: C22; C23
Keywords: Panel data; unit roots; moving average errors; heteroscedasticity

Corresponding Author: Dr Elias Tzavalis, Department of Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 264481, fax: (44) 1392 263242, email: E.Tzavalis@exeter.ac.uk