Testing for Unit Roots in Short Dynamic Panels with Serially Correlated and Heteroscedastic Disturbance Terms

In this paper we introduce fixed-T unit root tests for panel data models with serially correlated and heteroscedastic disturbance terms. The tests are based on pooled least squares estimators for the autoregressive coefficient of the AR(1) panel model adjusted for their inconsistency. The proposed test statistics have normal limiting distributions when the cross-section dimension of the panel grows large, provided a condition involving the 4+δ-th order moments of the first differences of the data is satisfied. Monte Carlo evidence suggests that the tests have empirical size close to the nominal level and considerable power, even for MA(1) disturbance terms which exhibit strong negative autocorrelation.