Computational Economics

, Volume 52, Issue 1, pp 167–193 | Cite as

Testing for Unit Roots in Dynamic Panels with Smooth Breaks and Cross-Sectionally Dependent Errors

  • Tolga Omay
  • Mübariz Hasanov
  • Yongcheol Shin


We develop the extended unit root testing procedure for dynamic panels characterised by slowly moving trends (SMT) and cross-section dependence (CSD). We allow SMT to follow the smooth logistic transition function and the components error terms to contain the unobserved common factors. We propose the two panel unit root test statistics, one derived by the extended common correlated effects (CCE) estimator and the other based on the Sieve bootstrap. We have conducted extensive simulation exercises and document that the failure to take into account SMT and CSD may lead to misleading inference. On the other hand, we find that both bootstrap and CCE-based tests maintain good power properties in small samples in the presence SMT and CSD. We apply our proposed tests to real interest rates for 17 OECD countries and find overwhelming evidence in favour of the Fisher hypothesis.


Slow moving trends Cross-section dependence Common correlated estimator Bootstrap Panel unit root tests 

JEL Classification

C12 C22 O47 



We would like to thank the editor and two anonymous referees for most constructive and helpful comments and suggestions, which help us to greatly improve the quality of the paper. The usual disclaimer applies.

Supplementary material

10614_2017_9667_MOESM_ESM.docx (313 kb)
Supplementary material 1 (docx 312 KB)


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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Department of EconomicsAtılım University, Kızılcaşar Mahallesiİncek, Gölbaşı, AnkaraTurkey
  2. 2.Department of Banking and FinanceOkan UniversityIstanbulTurkey
  3. 3.Department of Economics and Related StudiesUniversity of YorkYorkUK

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