A simple test for nonstationarity in mixed panels with incidental trends

- The paper considers the very relevant problem of testing for a unit root in panels with incidental trends.
- The test of Ng (2008) has attracted much attention in the literature.
- In the incidental trends case the Ng (2008) test is size distorted and its power properties are unknown.
- The present paper proposes a bias-adjusted version that is shown to outperform the original test.
- The bias-adjusted test is shown to suffer from the incidental trends problem.

Ng (2008) shows how the cross-sectional variance of the observed panel data can be used to construct a simple test for the proportion of non-stationary units. However, in the case with incidental trends the test is distorted. The present note shows how the distortions can be substantially reduced by the use of bias-adjustment. It also investigates the local power of the bias-adjusted test, which is shown to suffer from the same incidental trends problem previously only documented for conventional t-tests.