Abstract :
An effective way to control for cross-section correlation when conducting a panel
unit root test is to remove the common factors from the data. However, there remain
many ways to use the defactored residuals to construct a test. In this paper, we
use the panel analysis of nonstationarity in idiosyncratic and common components
(PANIC) residuals to form two new tests. One estimates the pooled autoregressive
coefficient, and one simply uses a sample moment. We establish their large-sample
properties using a joint limit theory. We find that when the pooled autoregressive
root is estimated using data detrended by least squares, the tests have no power. This
result holds regardless of how the data are defactored. All PANIC-based pooled tests
have nontrivial power because of the way the linear trend is removed.
