Panel Unit Root Test with Nonlinear Mean Reversion and Smooth Breaks

This paper extends the unit root test of Christopoulos and Leòn-Ledesma (2010) to accommodate not only structural breaks and non-linear mean reversion, but also the contemporaneous cross-sectional dependence commonly found in panel dataset. The proposed test presents good finite sample properties and its applications on four major ASEAN countries’ real exchange rates show that the unit root hypothesis could be rejected, supporting their long-run Purchasing Power Parity (PPP) against the Chinese Yuan.