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RE: st: Best test to detect trends in panel data


From   Gordon Hughes <G.A.Hughes@ed.ac.uk>
To   statalist@hsphsun2.harvard.edu
Subject   RE: st: Best test to detect trends in panel data
Date   Fri, 27 Apr 2012 10:55:44 +0100

As you have noted, the different approaches test different hypotheses. However, panel unit root tests are never likely to be informative when you have such a small number of observations for each panel unit. People differ on the minimum number of time periods required when unit root tests are used to identify trends but a maximum of 10 - and an average of 7.4 - is certainly too small.

Unfortunately, the same is probably true for -xtreg-. In this case, you are testing whether there is the *same* time trend for each panel unit, so that even if every individual panel had a time trend you might still find that the coefficient on period in your model was not significantly different because of variation across panel units.

There is a further problem - the missing values in your data - since some more sophisticated specifications required balanced panel data. You could try estimating the random coefficient model -xtrc- which will give you a better sense of the mean value of the time trends across panel units. Of course, the limited number of time periods is likely to mean that the standard error of the mean time trend will be large.

Gordon Hughes
g.a.hughes@ed.ac.uk


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