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A nonlinear panel unit root test under cross section dependence

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Cerrato, Mario, Peretti, Christian de and Sarantis, Nicholas (2007) A nonlinear panel unit root test under cross section dependence. Centre for International Capital Markets discussion papers, 2007 (14). pp. 1-31. ISSN 1749-3412

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Abstract

We propose a nonlinear heterogeneous panel unit root test for testing the null hypothesis of unit-root processes against the alternative that allows a proportion of units to be generated by globally stationary ESTAR processes and a remaining non-zero proportion to be generated by unit root processes. The proposed test is simple to apply and accommodates cross section dependence. Monte Carlo simulations shows that our test holds correct size and under the hypothesis that data are generated by globally stationary ESTAR processes has a better power than the recent linear test proposed in Pesaran (2005). An application to a panel of bilateral real exchange rates with the US Dollar from the 20 major OECD countries is provided.

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