A Simple Panel Stationarity Test in the Presence of
Cross-Sectional Dependence
December 2008
(Revised: June 2010)
Abstract
This paper develops a simple test for the null hypothesis of stationarity in heterogeneous panel data with cross-sectional dependence in the form of a common factor in the disturbance. We do not estimate the common factor but mop-up its e¤ect by employing the same method as the one proposed in Pesaran (2007) in the unit root testing context. Our test is basically the same as the KPSS test but the regression is augmented by cross-sectional average of the observations. The limiting distribution under the null is shown to be a standard normal. The latter result is derived using the joint asymptotic limits where T and N → ∞ simultaneously (under the additional condition that N/T → 0). We also extend our test to the more realistic case where the shocks are serially correlated. We use Monte Carlo simulations to examine the finite sample property of the panel augmented KPSS test.
