A Simple Panel Stationarity Test in the Presence of Cross-Sectional Dependence

This paper develops a simple test for the null hypothesis of stationarity in heterogeneous panel data with cross-sectional dependence in the form of a common factor in the distur-bance. We do not estimate the common factor but mop-up its e¤ect by employing the same method as the one proposed in Pesaran (2007) in the unit root testing context. Our test is basically the same as the KPSS test but the regression is augmented by cross-sectional average of the observations. We also develop a Lagrange multiplier (LM) test allowing for cross-sectional dependence and, under restrictive assumptions, compare our augmented KPSS test with the extended LM test under the null of stationarity, under the local alter-native and under the \u85xed alternative, and discuss the di¤erences between these two tests. We also extend our test to the more realistic case where the shocks are serially correlated. We use Monte Carlo simulations to examine the \u85nite sample property of the augmented KPSS test. JEL classi\u85cation: C12, C3