Journal Article

Structural Changes, Common Stochastic Trends, and Unit Roots in Panel Data

Jushan Bai and Josep Lluís Carrion-I-Silvestre

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 2, pages 471-501
Published in print April 2009 | ISSN: 0034-6527
Published online April 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2008.00530.x
Structural Changes, Common Stochastic Trends, and Unit Roots in Panel Data

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This paper studies the problem of unit root testing in the presence of multiple structural changes and common dynamic factors. Structural breaks represent infrequent regime shifts, while dynamic factors capture common shocks underlying the comovement of economic time series. We examine the modified Sargan-Bhargava (MSB) test in the panel data setting and propose ways to handle multiple structural changes and dynamic factors. Properties of the MSB test under these non-standard conditions are derived. For example, the test statistics are shown to be invariant, in the limit, to mean breaks. This invariance does not carry over to breaks in linear trends, where the test statistics will converge to functionals of weighted Brownian bridges. A simplified test statistic is then proposed, which is invariant to both mean and trend breaks. We further study pooled test statistic based on standardization and combination of p-values. Response surfaces for p-values of all test statistics are computed to facilitate the empirical implementation of the proposed methodology. The pooled tests are shown to have good finite sample performance.

Keywords: C23

Journal Article.  12015 words.  Illustrated.

Subjects: Single Equation Models; Single Variables

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