Paris-Jourdan Sciences Economiques (PSE), CEPREMAP

This paper proposes a new test for structural instability in hetero-geneous panels. The test builds on the seminal work of Andrews (2003) originally developed for time series. It is robust to non-normal, het-eroskedastic and serially correlated errors, and allows for the number of post break observations to be small. Importantly, the test considers the alternative of a break affecting only some- and not all- individuals of the panel. Under mild assumptions the test statistic is shown to be asymptotically normal, thanks to the additional cross sectional dimen-sion of panel data. This greatly facilitates the calculation of critical values. Monte Carlo experiments show that the test has good size and power under a wide range of circumstances. The test is then applied to investigate the effect of the Euro on trade