Unit root tests for panel data

Article Abstract:

This paper develops unit root tests for panel data. These tests are devised under more general assumptions than the tests previously proposed. First, the number of groups in the panel data is assumed to be either finite or infinite. Second, each group is assumed to have different types of nonstochastic and stochastic components. Third, the time series spans for the groups are assumed to be all different. Fourth, the alternative where some groups have a unit root and others do not can be dealt with by the tests. The tests can also be used for the null of stationarity and for cointegration, once relevant changes are made in the model, hypotheses, assumptions and underlying tests. The main idea for our unit root tests is to combine p-values from a unit root test applied to each group in the panel data. Combining p-values to formulate tests is a common practice in meta-analysis. This paper also reports the finite sample performance of our combination unit root tests and Im et al.'s [Mimeo (1995)] t-bar test. The results show that most of the combination tests are more powerful than the t-bar test in finite samples. Application of the combination unit root tests to the post-Bretton Woods US real exchange rate data provides some evidence in favor of the PPP hypothesis. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: C33 Keywords: Unit root test; Panel data; Meta-analysis: Purchasing power parity

United States, Economic research

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Forecasting real exchange rates

Article Abstract:

Substantial evidence sustains the belief that real exchange rates do not possess unit roots but instead demonstrate mean reversion. Longer time horizons enhance the performance of the approximated forecast models in relation to the standard driftless random walks. Longer estimation durations especially enhance performance in relation to the benchmark. The forecasting power in simple statistical model appears authentic, however, the models resolve only a modest part of the uncertainty concerning the revolution of real exchange rates.

Foreign Currency Management, Usage, Foreign exchange, Statistical sampling, Sampling (Statistics)

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