Testing for a Structural Break in a Spatial Panel Model

Abstract

Abstract:We consider the problem of testing for a structural break in the spatial lag parameter in a panel model (spatial autoregressive). We propose a likelihood ratio test of the null hypothesis of no break against the alternative hypothesis of a single break. The limiting distribution of the test is derived under the null when both the number of individual units N and the number of time periods T is large or N is fixed and T is large. The asymptotic critical values of the test statistic can be obtained analytically. We also propose a break-date estimator that can be employed to determine the location of the break point following evidence against the null hypothesis. We present Monte Carlo evidence to show that the proposed procedure performs well in finite samples. Finally, we consider an empirical application of the test on budget spillovers and interdependence in fiscal policy within the U.S. states.

Characterizing growth instability: new evidence on unit roots and structural breaks in countries’ long run trajectories

“…The test, nevertheless, features a search algorithm based on the minimization of t-statistics which has been shown to perform poorly in identifying the correct number of shifts and their dates (Vogelsang and Perron 1998;Lee and Strazicich 2001). Recent contributions in the field have addressed specific aspects such as the possibility of I(1) models with breaks (Carrion-i Silvestre et al 2009;Harvey et al 2013), extensions to spatial panel models (Baltagi et al 2016;Sengupta et al 2017) and the consistency of trend break locations (Yang et al 2017). 8 Unit roots and structural break tests have been applied to a wide range of macroeconomic time series including inflation and interest rates (Clemente et al 2017), unemployment (García-Cintado et al 2015Cheng et al 2014), exchange rates (Månsson and Sjölander 2014), and commodity and oil prices (Gadea et al 2017;Winkelried 2018).…”

Kristalina Georgieva-led IMF Prediction, Shocks, and Stability in the West African Monetary Zone

“…Yang (2017) addresses the issue of consistency of trend shift breakpoint estimators in the presence of an underspecified break figures. The study found that in an underspecified break figures, there is no convergence between trend shift breakpoint estimator and the time break points Sengupta (2017) proposed a break-date estimator that would determine the location of the breakpoint. In a study to test for U.S budget spillover and interdependencies in fiscal policy for the period covering 1960-2011.…”