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A wavelet-based panel unit-root test in the presence of an unknown structural break and cross-sectional dependency, with an application of purchasing power parity theory in developing countries
Department of Economics and Statistics, Karlstad University, Karlstad, Sweden.
Jönköping University, Jönköping International Business School, JIBS, Statistics. Department of Economics and Statistics, Göteborg University, Göteborg, Sweden.
Jönköping University, Jönköping International Business School, JIBS, Statistics.ORCID iD: 0000-0003-3144-2218
Jönköping University, Jönköping International Business School, JIBS, Statistics. Department of Economics and Statistics, Linnaeus University, Växjö, Sweden.ORCID iD: 0000-0002-3416-5896
2017 (English)In: Applied Economics, ISSN 0003-6846, E-ISSN 1466-4283, Vol. 49, no 21, 2096-2105 p.Article in journal (Refereed) Published
Abstract [en]

This article introduces two different non-parametric wavelet-based panel unit-root tests in the presence of unknown structural breaks and cross-sectional dependencies in the data. These tests are compared with a previously suggested non-parametric wavelet test, the parameteric Im-Pesaran and Shin (IPS) test and a Wald type of test. The results from the Monte Carlo simulations clearly show that the new wavelet-ratio tests are superior to the traditional tests both in terms of size and power in panel unit-root tests because of its robustness to cross-section dependency and structural breaks. Based on an empirical Central American panel application, we can, in contrast to previous research (where bias due to structural breaks is simply disregarded), find strong, clear-cut support for purchasing power parity (PPP) in this developing region.

Place, publisher, year, edition, pages
Routledge, 2017. Vol. 49, no 21, 2096-2105 p.
Keyword [en]
cross-sectional dependency; Panel unit-root test; structural break; wavelet
National Category
Probability Theory and Statistics
Identifiers
URN: urn:nbn:se:hj:diva-31591DOI: 10.1080/00036846.2016.1231908ISI: 000396793200005Scopus ID: 2-s2.0-84991220454OAI: oai:DiVA.org:hj-31591DiVA: diva2:956653
Available from: 2016-08-31 Created: 2016-08-31 Last updated: 2017-06-08Bibliographically approved

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