Abstract

In a recent study, Westerlund (Empir Econ 37:517-531, 2009) shows that the performance of the popular LLC (Levin et al., J Econ 108:1-24, 2002) panel unit root test depends critically on the choice of lag truncation used when correcting for serial correlation, and that it is only when this parameter is set as a function of time that the power raises above size. The purpose of the current paper is to propose a modified test that does not suffer from this drawback. The new test is not only simpler to compute but also superior in terms of small-sample performance, which is illustrated using an example purchasing power parity for less developed countries.

Keywords

Non-stationary panel data; Panel unit root test; Purchasing power parity; Cross-section dependence

Published in

Empirical Economics
2013, Volume: 44, number: 2, pages: 833-860

UKÄ Subject classification

Economics


Publication identifier

DOI: https://doi.org/10.1007/s00181-012-0552-x

Permanent link to this page (URI)

https://res.slu.se/id/publ/86282