Much is written about the use of factors estimated by the method of principal components from large panels in linear regression models. In this paper, we provide an analysis for non-linear estimation and establish the conditions under which the estimated factors can be treated as though they...

In a recent paper, Engel, C. (1999) presents monte-carlo evidence to suggest that unit root tests cannot detect a non-stationary component in the real exchange rate even when this component accounts for almost half of its longhorizon forecast error variance. This hidden non-stationary component...