The Global Dimension to Fiscal Sustainability



3.1PANIC Panel Unit Root Test

The PANIC approach introduced by Bai and Ng (2004) uses a factor structure
to understand the nature of nonstationarity in large dimensional panels. The Bai and
Ng factor model is set out for the case where only an intercept is included:

yit =ci +λi'Ft +eit,                                     (7)

Ft = αFt-1 + ut,                                       (8)

eit = ρieit-1 +εit.                                                (9)

The series yit is the sum of a cross section specific constant (ci), a common
component
λi'Ft and an error, eit, which is the idiosyncratic component. The series yit
is nonstationary if the common factors are nonstationary (α = 1, in equation (8))
and/or the idiosyncratic component (
ρi = 1, in equation (9)) are nonstationary. The
PANIC method allows us to identify whether nonstationarity is pervasive (due to the
common factor) or series specific (due to the individual series). Whether there is a
factor or not is identified by an information criteria, see Bai and Ng (2002). Unlike
Moon and Perron (2004) and Pesaran (2007), the PANIC test does not assume that
only the idiosyncratic component can have a unit root. In the present application, it is
particularly useful that PANIC determines explicitly whether the nonstationarity in a
series is pervasive or variable-specific.

We make use of two test statistics from Bai and Ng (2004). Firstly, an
Augmented Dickey Fuller test on the common factor (
ADFF ) and secondly a Fisher-
type pooled ADF test on the idiosyncratic individual errors (
ADFec ( i )). Bai and Ng
(2004) suggest the test statistic on the idiosyncratic element is distributed as standard
normal as follows:

11



More intriguing information

1. Quality Enhancement for E-Learning Courses: The Role of Student Feedback
2. AMINO ACIDS SEQUENCE ANALYSIS ON COLLAGEN
3. Whatever happened to competition in space agency procurement? The case of NASA
4. Spatial Aggregation and Weather Risk Management
5. Sex-gender-sexuality: how sex, gender, and sexuality constellations are constituted in secondary schools
6. The Economic Value of Basin Protection to Improve the Quality and Reliability of Potable Water Supply: Some Evidence from Ecuador
7. The Functions of Postpartum Depression
8. Knowledge and Learning in Complex Urban Renewal Projects; Towards a Process Design
9. The Tangible Contribution of R&D Spending Foreign-Owned Plants to a Host Region: a Plant Level Study of the Irish Manufacturing Sector (1980-1996)
10. Popular Conceptions of Nationhood in Old and New European
11. APPLYING BIOSOLIDS: ISSUES FOR VIRGINIA AGRICULTURE
12. An Investigation of transience upon mothers of primary-aged children and their school
13. The Environmental Kuznets Curve Under a New framework: Role of Social Capital in Water Pollution
14. A Theoretical Growth Model for Ireland
15. The name is absent
16. MANAGEMENT PRACTICES ON VIRGINIA DAIRY FARMS
17. Economies of Size for Conventional Tillage and No-till Wheat Production
18. The Impact of Individual Investment Behavior for Retirement Welfare: Evidence from the United States and Germany
19. Standards behaviours face to innovation of the entrepreneurships of Beira Interior
20. AN ANALYTICAL METHOD TO CALCULATE THE ERGODIC AND DIFFERENCE MATRICES OF THE DISCOUNTED MARKOV DECISION PROCESSES