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Testing for unit roots in panels by using a mixture model

By Edith Madsen


Preliminary This paper introduces a dynamic panel data model with exogenous variables where the dynamic behavior is allowed to differ between cross-section units. The framework is a mixture model obtained by mixing two regression model with different paramters according to some mixing weights. The parameters in the model are estimated by the method of maximum likelihood, and it is shown that the maximum likelihood estimator is consistent and asymptotically normally distributed. Within the mixture model it possible to distinguish between different unit root hypotheses that cannot be distinguished by existing test procedures. The method is applied to income data from the PSID. For this sample there is no evidence of unit roots in the income processes but the processes differ substantially between individuals

Topics: Dynamic panel data model, Mixture model, Maximum likelihood estimation, Random coef- Þcients, Unit root hypotheses JEL classiÞcation, C13, C16, C23 1
Year: 2003
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