PANIC in the presence of uncertainty about the deterministic trend

Most macroeconomic and financial panel variables are trending. However, because of the well-known power problem in the presence of incidental trends, many researchers gamble that their unit root test regressions can be ran without such trends, thereby running the risk of obtaining spurious results. This article takes one of the most general and popular panel unit root tests, known as PANIC, and shows how it can be modified to account for the uncertainty regarding the deterministic trend.

'I've been to Bali too' (and I will be going back) : are terrorist shocks to Bali's tourist arrivals permanent or transitory?

International visitor arrivals to Bali are examined using univariate and panel Lagrange multiplier (LM) unit root tests with one and two structural breaks to ascertain if shocks to the time path of tourist arrivals are permanent or transitory. The univariate LM unit root tests with one and two structural breaks fail to reject the null hypothesis of a unit root in international visitor arrivals to Bali. However, the panel LM unit root tests with one and two structural breaks applied to a panel of Bali's 11 major source markets reject the null and support the alternative hypothesis of a joint trend-stationary series with transitory shocks. This result suggests that, the effects of the recent terrorist acts on Bali on the growth path of tourist arrivals from major markets are only transitory and that as a consequence Bali's tourism sector is sustainable in the long run.

External shocks and tourist arrivals to Cambodia

This article investigates how external shocks affect tourist arrivals to Cambodia. The study relies on the random walk approach to test whether the shocks to tourist arrivals are temporary or persistent in nature. To facilitate the empirical investigation, the study applies and compares the results from different unit root tests and variance-ratio tests to the monthly tourists' arrival data from 1994 to December 2012. Both tests provide evidence of random walk hypothesis, implying that shocks to tourists' arrival to Cambodia have a persistent effect requiring short- to medium-term policies to combat the vulnerability due to those shocks. Public-private coordinated policies could reduce the impact, as we found that once the crisis (external shocks) is minimized, the magnitude of the shocks decays slowly.

Response of inflation to shocks: new evidence from Sub-Saharan African countries

In this paper, we investigate whether or not the inflation rate of 17 Sub-Saharan African countries can be modelled as a stationary process. We achieve this goal through using univariate and panel stationarity tests for data over the period 1966 to 2002. We use the Kwiatkowski, Phillips, Schmidt and Shin (KPSS, 1992) univariate test and allow for multiple structural breaks. We find that except for Burkina Faso, Burundi and Gambia, the inflation rate is stationary for the rest of the 14 countries. We then apply the panel version of the KPSS test, developed by Carrion-i-Silvestre et al. (2005), which accounts for multiple structural breaks. We find strong evidence of panel stationarity of the inflation rate. However, for a panel consisting of Burkina Faso, Burundi and Gambia, we could not find evidence that the inflation rate is stationary. © 2013 Elsevier B.V.

A sequential purchasing power parity test for panels of large cross-sections and implications for investors

In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors. © 2014 © 2014 Taylor & Francis.

Applied econometrics and implications for energy economics research

Developments in applied econometrics, particularly with regard to unit root tests and cointegration tests, have motivated a rich empirical literature on energy economics over the last decade. This study reviews recent developments in time series econometrics applications in the energy economics literature. We first consider the literature on the integration properties of energy variables. We begin with a discussion of the implications of whether energy variables contain a unit root and proceed to examine how results differ according to the specific unit root or stationarity test employed. We then proceed to examine recent developments in the literature on cointegration, Granger causality and long-run estimates between (disaggregated) energy consumption and economic growth. We review both single country and panel studies and pay particular attention to studies which have expanded the literature through adding variables such as financial development and trade, in addition to energy consumption to the augmented production function, as well as studies which have extended the literature through examining disaggregated energy consumption by type. In each case we highlight best practice in the literature, point to limitations in the literature, including econometric modeling challenges, and suggest recommendations for future research. A key message of our survey is that the profession needs to guard against 'overload' of research in these areas as most applied studies are no longer adding anything more to what is already known. © 2014 Elsevier B.V. All rights reserved.

A sequential purchasing power parity test for panels of large cross-sections and implications for investors

In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors.

The power of PANIC

The current paper considers the asymptotic local power of second-generation panel unit root tests that are robust to the presence of cross-section dependence in the form of common factors. As a basis for our analysis, we take the PANIC approach of Bai and Ng (2004, 2010), which is one of the single most popular and general second-generation approaches around.

Panel cointegration and the neutrality of money

Most econometric methods for testing the proposition of long-run monetary neutrality rely on the assumption that money and real output do not cointegrate, a result that is usually supported by the data. This paper argues that these results can be attributed in part to the low power of univariate tests, and that a violation of the noncointegration assumption is likely to result in a nonrejection of the neutrality proposition. To alleviate this problem, two new and more powerful panel cointegration tests are proposed that can be used under quite general conditions. The empirical results obtained from applying these tests to a panel covering ten countries between 1870 and 1986 suggest money and real output are cointegrated, and hence that the neutrality proposition must be rejected. © Springer-Verlag 2007.

Testing for error correction in panel data

This paper proposes new error correction-based cointegration tests for panel data. The limiting distributions of the tests are derived and critical values provided. Our simulation results suggest that the tests have good small-sample properties with small size distortions and high power relative to other popular residual-based panel cointegration tests. In our empirical application, we present evidence suggesting that international healthcare expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for. © 2007 Blackwell Publishing Ltd.

A panel CUSUM test of the null of cointegration

This paper proposes a simple residual-based panel CUSUM test of the null hypothesis of cointegration. The test has a limiting normal distribution that is free of nuisance parameters, it is robust to heteroskedasticity and it allows for mixtures of cointegrated and spurious alternatives. Our Monte Carlo results suggest that the test has small-size distortions and reasonable power. In our empirical application to international R&D spillovers, we present evidence suggesting that total factor productivity is heterogeneously cointegrated with foreign and domestic R&D capital stocks. © Blackwell Publishing Ltd, 2005.

Testing for convergence in carbon dioxide emissions using a century of panel data

This paper tests the convergence in per-capita carbon dioxide emissions for a collection of developed and developing countries using data spanning the period 1870-2002. For this purpose, three recently developed panel unit root tests that permit for dependence among the individual countries are employed. The results lend strong support in favor of convergence for the panel as a whole. Estimates of the speed of this convergence is also provided. © 2007 Springer Science+Business Media B.V.

Output and labor productivity in organized manufacturing: a panel cointegration analysis for India

One of the policy puzzles faced in India during the last two and half decades has been the weak association between output and labor markets, particularly in the manufacturing sector. In this research, we investigate the long-run relationship between output, labor productivity and real wages in the case of organized manufacturing. We adjust the measure of labor productivity incorporating bottlenecks, such as lack of infrastructure, access to external finance, and labor regulations, which all may influence labor market outcomes. Using panel data from seventeen manufacturing industries, we establish long-run dynamics for the output-labor productivity-real wages series over a period of nearly three decades. We employ recently developed panel unit root and cointegration tests for cross-sectional dependence to incorporate heterogeneity across industries. Long-run elasticities are generally found to be low for labor productivity compared to real wages due to the changes in manufacturing output. There are variations across industries within the manufacturing sector for the effects of the labor market on manufacturing output. In some industries, lower wages are associated with higher output, and the reason for the positive relationship in other industries could be due to workers' bargaining power.

Panel cointegration tests of the Fisher effect

Most empirical evidence suggests that the Fisher effect, stating that inflation and nominal interest rates should cointegrate with a unit slope on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. For this purpose, we propose two new panel cointegration tests that can be applied under very general conditions, and that are shown by simulation to be more powerful than other existing tests. These tests are applied to a panel of quarterly data covering 20 OECD countries between 1980 and 2004. The evidence suggest that the Fisher effect cannot be rejected once the panel evidence on cointegration has been taken into account. Copyright © 2008 John Wiley & Sons, Ltd.