Panel methods to test for unit roots and cointegration

Abstract

We provide an up-to-date analytical survey of methods which have been developed to deal with estimation and inference in non-stationary panels. The chapter provides information not only on the tools but also interprets the literature and highlights the important challenges that remain. We discuss the difficulties involved in formulating hypotheses within a panel framework with unit roots and cointegration. These issues include incorporating cross-sectional dependence and structural breaks in the data. Both these features are widely prevalent in the panels and lead to complications in estimation and inference. For example, factor models are a widely used class of methods used to deal with dependence but constitute only one of several ways of formulating the problems involved. We argue that the links between cointegration and factor models in panels need to be considered adequately and the asymptotic theory put on a firmer footing in many respects. The study of cross-sectional dependence, breaks, and multiple cointegrating vectors, all of which are in their relative infancy, mark the way for productive research in the years ahead.