Panel Seasonal Unit Root Test: Further Simulation Results and An Application to Unemployment Data

In this paper the seasonal unit root test of Hylleberg et al. (1990) is generalized to cover a heterogenous panel. The procedure follows the work of Im, Pesaran and Shin (2002) and is independently proposed by Otero et al. (2004). Test statistics are given and critical values are obtained by simulation. Moreover, the properties of the tests are analyzed for different deterministic and dynamic specifications. Evidence is presented that for a small time series dimension the power is low even for increasing cross section dimension. Therefore, it seems necessary to have a higher time series dimension than cross section dimension. The test is applied to unemployment data in industrialized countries. In some cases seasonal unit roots are detected. However, the null hypotheses of panel seasonal unit roots are rejected. The null hypothesis of a unit root at the zero frequency is not rejected, thereby supporting the presence of hysteresis effects.