Unit Roots and Cointegration in Panels

Abstract

This paper provides a review of the literature on unit roots and cointegration in panels where the time dimension (T ), and the cross section dimension (N ) are relatively large. It distinguishes between the …rst generation tests developed on the assumption of the cross section independence, and the second generation tests that allow, in a variety of forms and degrees, the dependence that might prevail across the di¤erent units in the panel. In the analysis of cointegration the hypothesis testing and estimation problems are further complicated by the possibility of cross section cointegration which could arise if the unit roots in the di¤erent cross section units are due to common random walk components.JEL Classi…cation: C12, C15, C22, C23.

On the dynamics of gasoline market integration in the United States: Evidence from a pair-wise approach

“…While pair-wise studies such as Pesaran (2007), Nourry (2009) Breitung and Pesaran (2008), have attempted to allow for possible cross-section dependence through unobserved common factors, but their applications are complicated by the uncertainties surrounding the number of unobserved factors, the nature of the unit root process (whether it is common or individual specific), and the fact that longer data spans are required for taking into account the cross-section dependence. The pair-wise method is robust to cross-sectional dependence.…”

Is the ‘euro effect’ on trade so small after all? New evidence using gravity equations with panel cointegration techniques

“…First, unlike previous research, (excepting Eicher and Henn, 2011) we address BT's critiques regarding the proper specification of gravity models and the definition of the variables, as we account for multilateral resistance, as well as unobserved bilateral heterogeneity. Second, we apply an econometric methodology comprising of a range of techniques to test and estimate efficiently in a non-stationary panel framework, solving endogeneity prob-5 See for example Breitung and Pesaran (2008) for an overview of the literature and Gengenbach et al (2010) for a comparison of panel unit root tests. lems as well as possible biases posed by structural breaks, country pair specific trends and cross-section dependence.…”

Energy Consumption and Economic Growth Revisited: Structural Breaks and Cross-Section Dependence

“…Thus, they argued that the conclusions of many empirical studies may be based upon misleading inference since the assumption of independent panel members is usually not valid (Urbain and Westerlund, 2006). Until recently, only few so-called second generation panel tests have been proposed that take into account the existence of cross-sectional dependency relations (see Breitung and Pesaran, 2008, for a recent survey). Hence, the innovative contribution of the present paper is the application of panel econometric techniques that consider both structural breaks and cross-sectional dependence to provide more accurate and reliable results.…”