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Faculty of Economics

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Pesaran, M. H.

On the interpretation of panel unit root tests

Economics Letters

Vol. 116(3) pp. 545-546 (2012)

Abstract: Applications of panel unit root tests have become commonplace in empirical economics, yet there are ambiguities as how best to interpret the test results. This note clarifies that rejection of the panel unit root hypothesis should be interpreted as evidence that a statistically significant proportion of the units are stationary. Accordingly, in the event of a rejection, and in applications where the time dimension of the panel is relatively large, it recommends the test outcome to be augmented with an estimate of the proportion of the cross-section units for which the individual unit root tests are rejected. The economic importance of the rejection can be measured by the magnitude of this proportion.

JEL Codes: C12, C33, C52

Author links: M. Hashem Pesaran  

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