An Improved Panel Unit Root Test Using GLS-Detrending

Abstract

We propose to combine recent developments in univariate and multivariate unit root testing in order to construct a more powerful panel unit root test. We extend the GLS-detrending procedure of Elliott, Rothenberg and Stock (1996) to a panel Augmented Dickey-Fuller test. The finite sample power properties of the new test demonstrate a very large gain when compared to existing tests, especially for small panels. We then investigate the topic of Purchasing Power Parity for the post Bretton- Woods period via this new test. The results show strong rejections of the unit root hypothesis.DF-GLS test, Panel unit root